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Hornig:The Oil Spill is The Least of Florida's Problems

Media coverage of the Gulf oil spill’seffect on the gulf has focused on tourist income lost by the waterfront towns with footage of empty beaches, restaurants and T-shirt shops dominates the news. Interviews with devastated business owners are heart-rending. But they always end with references to somehow hanging on until “things get back to normal.”

Trouble is, things are not going to “normalize.” Not for the Panhandle of Florida, and probably not for the rest of the state, either.

Up until very recently, many believed that Florida could expect oil all along its coasts as a result of the spill. While that looks less likely each day, well before BP’s well began spewing crude, pressures within the state’s economy were building. It was an explosive situation, awaiting a match.

The fear of oily beaches and dying wildlife were that match.

Workers are seen clearing the beach of the oil residue that has washed up on Pensacola Beach from the Deepwater Horizon oil spill in the Gulf of Mexico on June 7, 2010 in Pensacola, Florida. Early reports indicate that BP's latest plan to stem the flow of oil from the site of the Deepwater Horizon incident may be having some success.
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Workers are seen clearing the beach of the oil residue that has washed up on Pensacola Beach from the Deepwater Horizon oil spill in the Gulf of Mexico on June 7, 2010 in Pensacola, Florida. Early reports indicate that BP's latest plan to stem the flow of oil from the site of the Deepwater Horizon incident may be having some success.

Take unemployment.

Statewide, it ballooned from 3% in 2006 to a peak of 12.3% in February 2010. Though it’s backed off, it remains in double-digit territory at 11.2%.

"Officially"— though official numbers understate the problem. Illegal immigrants, some 4.5% of Florida’s population, aren’t counted; the long term unemployed and aging workers are regularly purged, even if they’re still looking for work.

This in a state already confronted with the worst of the coming healthcare/taxation crunch. It has the second oldest population in the nation and, as its citizens retire, their earnings fall off, causing tax revenues to drop. At the same time, healthcare bills rise, stressing social service budgets. Florida is ground zero for Baby Boomer demographics. With 600 seniors for every 1000 workers now, and the number trending inexorably higher, soon every employed person in the state will essentially have to adopt one senior, to care for out of his or her paycheck.

Housing? Naturally, rising unemployment amplifies the difficulties of maintaining home ownership. With further negative effects from the oil, we can only expect the situation to worsen. A tsunami of defaults and foreclosures—and bank failures—would not be a surprise.

Florida is mortgaged to the hilt.

It ranks second only to California in total securitized non-agency mortgage loans,10% of the national total. Of those, half are 60 days or more delinquent, or 16% of all such mortgage delinquencies in the country, the highest such ratio anywhere. The state is full of retirees trying to live on modest incomes while hanging on to their homes. Unsurprisingly, this has led to a disproportionate amount of at-risk loans. 85% of the statewide pool is rated Alt-A or Subprime.

"Florida’s coming problems are intractable, at best; the least bit of bad luck and they may become utterly irresolvable." -Casey Research, Doug Hornig

Nor has the crash in prices bypassed the Sunshine State. Nationally, fewer than 30% of houses sold for a loss in the past year, compared to nearly 50% in Miami and 65% in Orlando.

Many would be sellers are clinging to the cliff edge by their fingernails. Overall, 81% of all Florida loans are under water, with the average mark-to-market loan-to-value ratio standing at 138%. Almost 40% of borrowers are crushed beneath debt of more than 150% of the value of their homes.

State government is no better off.

As the oil cuts into employment prospects, tax revenues will nosedive, and even before the blowout the state was broke. The projected budget shortfall for fiscal year 2011 was $4.7 billion. What it will actually be is anyone’s guess -- a bigger number is baked in the cake — but at $4.7B it already represented more than 22% of the FY10 budget.

Both tax hikes and service cuts are political suicide. And desperately raising taxes in a depressed economy tends to decrease revenue, anyway. Yet a balanced budget is mandated by law. Where will the additional money and/or savings come from?

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Then there’s Florida’s $113.8 billion public pension fund. It must generate earnings of 7.75 percent per year to meet its commitments to the nearly one million public employees and retirees who depend on it. What safely yields 7.75% today? Nothing. So the fund’s administrators are asking for permission to try some “riskier” investments. Maybe they’ll succeed. Or maybe they’ll wind up staring down the barrel of a pensioner’s riot.

Florida’s coming problems are intractable, at best; the least bit of bad luck and they may become utterly irresolvable.

Expect bailouts.

Washington will not be able to ignore what happens to this beleaguered state. The federal government will be forced to spend yet more vast sums of money that it doesn’t have, on a recovery that will take years, if it ever happens.

And that makes Florida’s plight a looming horror for us all.

Editor's Note: An earlier version of this post mischaracterized the current environmental conditions in Florida. This post has been updated and corrected.

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Doug Hornig is a senior editor at Casey Research, a publisher of contrarian investment advisories with focus on precious metals, energy, technology, and big-picture trends.