State and Local Government Revenues Have Stabilized

The National Conference of State Legislatures has published a report State Budget Update: November 2010.  In it the NCSL says that most states and local government agencies have seen a stabilization of revenues coming into their coffers.  From the report:

an increasing majority of state legislative fiscal directors are reporting that the revenue outlook for the remaining seven months of FY 2011 looks promising. At the same time, however, most states also are forecasting significant budget gaps in FY 2012. ... Funds from the American Recovery and Reinvestment Act (ARRA) have helped support state budgets since FY 2009. States will face a $37.9 billion loss in federal funds in FY 2012 compared to FY 2011, according to the Federal Funds Information for States. This is expected to make big holes in state budgets, what many state officials call the "ARRA cliff effect."

As you can see, the report also points out that without another round of ARRA funding (unlikely with the new Republican majority in the House) the holes in state budgets will widen.  Many states used accounting gimmicks in a effort to close budget holes in past years. These gimmicks were mostly intended to fix a short-term problem (budget deficits) while relying on impossible tax revenue growth to fill the budget gap in future years.  Basically, many states made budget adjustments as if the recession would last only one year and that the recovery would be immediate, strong, and long-lasting- as if the Federal Reserve and Congress would be their Viagra.

As with most drugs, the end result was a masking of the symptoms while the underlying cause of the matter (too much spending) had not been sufficiently addressed.  With ARRA ending and not coming back, State and Local governments will now have another round of addressing significant deficits in a world where tax increases are being fought tooth and nail by taxpayers.

Goldman Sachs put out report the other day that backs up the above claim. In their December 17 US Economic Analyst Report:

The ability of states to defer adjustment is waning, based on public comments from state officials and budget analyst reports. Most states have tapped rainy day funds, privatized assets, decreased pension fund contributions, delayed wage or contractor payments, and so on. While there are many possible tactics, the hardest-hit jurisdictions have already exhausted the most practical and politically attractive options, and so further budget adjustments are more likely to be made through spending cuts.

There is a lot more in that report that is worth reading including a prediction about employment growth (or lack thereof).  I don't particularly agree with their call of 3.5% GDP growth next year.  Without stimulus that would be difficult to reach. I also don't expect a recession late this year or early next but instead a long period of "muddling through" where high unemployment and slow growth becomes the norm. That is an environment where taxpayers will still fight any and all tax increases making it more incumbent on state and local officials to find ways to cut spending in a fashion that will be acceptable to taxpayers.

Here in Mt Lebanon we had seen significant reductions in Real Estate Transfer Tax revenues (which make up about 1% of the budget) and also a downward trend in Earned Income Tax (which make up just more than 5% of the budget).  Real Estate taxes are always stable since there have been no significant changes to assessed values since 2002.  These realities, however, will force a prioritization of services offered by both the Municipality and the School District until revenues begin to grow again.

Thanks for reading.

James