The State and Local Government Crisis Looms Larger

By James Kwak

Although you may pay more taxes to the federal government, there is a good chance that the public services you are more likely to actually encounter in your life are provided by state or local governments – schools, swimming pools, police, fire, etc. While a lot of attention has focused on the federal government’s deficit problems, the problem for state and local governments, which generally have less fiscal flexibility (and cannot print money) is at least equally serious.

Here is the projected aggregate state/local government budget gap under two scenarios. First the “low gap” (optimistic) picture:

click to enlarge

And here’s the high-gap (pessimistic) scenario:

click to enlarge

The charts are from a presentation by Don Boyd of the Rockefeller Institute at the Chicago Fed. The space between the solid blue and dashed green lines is the impact of federal aid to states in the most recent stimulus package.

Comments

[Mick Weinstein:]

Very interesting, and concerning. I'd like some historical perspective on this - have budget gaps in state/local govt. even been so deep?

Jun 08 10:03 AM

[Leftfield:]

Our leaders have been busy outsourcing jobs for decades and covering it with government jobs and deficits and easy credit. We may be in for really tough times for a long time and many more of us will regret the squandering of trillions at the beginning of it.

Jun 08 10:26 AM

[Jeff Miller:]

The key points from the Don Boyd paper are the following:

1) Stimulus has not yet hit
2) The effect is quite significant, but temporary
3) More action might be required

In an environment with so much economic uncertainty, it is well to shorten our time horizons a bit.

There are some who think the stimulus was too little, and some who think it was unnecessary. If something seems to be helping in the near term, there is a large group assuring us that eventually it will be a disaster.

In practice, policy makers adjust to events.

Jun 08 10:40 AM

[shootpar2001:]

Stimulus is too little????
Stimulus is too much????

Either way, it is additional capital moving through the system.
The main problem is that it is only replacing capital that is not being used (watchful waiting).
Money given to states is being used to pay unemployment (un-stimulative) or pay overdue bills (healthcare, etc.).
Again unstimulative!!!!
Excess spending of a couple of decades does not get (de-levered)
in just a couple of years, and taxing anything that moves; just brings more waiting.
Answer: Cut the size of non-productive government.
Politician response: More government!!!

Jun 08 11:16 AM

[Steven Hansen:]

i would guess that a sizable portion of the stimulus will not be spent as the states will not be in a position to manage the spending.

we need a stimulus for the stimulus.

seriously, you cannot throw out bullshit and call it steak. both the government and the Fed are saying recovery is in view. if it is, no more stimulus is necessary.

Jun 08 11:38 AM

[TinyTim:]

"Although you may pay more taxes to the federal government, there is a good chance that the public services you are more likely to actually encounter in your life are provided by state or local governments"

Very true. So why does tax money flow from the top down instead of the bottom up? I always advocate putting the taxing entity closer to the taxed. I think it would create better fiscal checks and balances.

Jun 08 02:00 PM

[TeresaE:]

Michigan is already using stimulus to plug budget gaps as their are NO requirements from Washington for the states to use the money for which it is earmarked.

California will do the same thing.

At most a 2 year reprieve of absolute destruction.

But at the rate the feds, states, banks & big business are firing our best customers and forcing small companies into bankruptcy, both charts are off the map.

Washington cannot print money fast enough to plug the holes that the GM & Chrysler bankruptcies are creating for states & cities across the country.

Small business pays the BULK of local taxes and they are broke.

Wake up people. Not only is the federal taxes and mandates going to crush your budget, your state & local are going to take the rest.

We are in deep crap while government employees will get raises, lifetime pay and the best benefits.

Jun 08 02:29 PM

[Danny Newton:]

The requirement for projects to be "shovel ready" assured that the stimulus spending would land on areas of the budget already supported by land purchases, environmental studies and zoning approvals. Enormous pressure will be placed on states to increase their gasoline taxes so that states can match the money available from the 18.4 cent federal tax on gasoline. Diesel taxes are even higher.

This seems counterintuitive since the feds have not raised the gas tax since 1997. Many states have already raised their taxes since then and should therefore be ahead of the curve. States that have wasted their money with goofball transit projects like the Big Dig were not blessed in any substantial way with the billions spent. Tolls and sales tax increases were raised to assist in paying the Big Dig off. Worst of all, looking at the BEA data on Per Capita Income or Personal Income, I can see nothing that indicates that the $14 Billion did a lot with respect to economic development. There should be some kind of spike in the numbers according to the expectations of the proponents.

Many local governments are guilty of thinking of credit as being income. Taxes have been kept at a doable rate of increse by borrowing. That will work only when the value of the infrastructure exceeds the cost plus finance cost. Some states are borrowing money to mow the grass or take pressure off of their retirement systems. This is a warning sign for most credit rating agencys.

Jun 08 03:30 PM