Wednesday, March 18, 2020

The Coming Fiscal Crisis Of State And Local Governments

Yesterday my wife Marina and I mt with our personal attorney, a close friend also, to fix  some loose ends in our wills due to some recent family deaths, as well the current situation.  He also happens to sit on the Harrisonburg City Council, as well as having been Mayor for awhile and a longtime member of the city Planning Commission, someone whose competence we have great respect for.  Anyway, he noted that on April 14 the City Manager is to present a proposed budget to the City Council, and that it will have a giant hole in it given that taxes on restaurants are a significant source of revenues for the city, and while not completely shut down, restaurants are now seriously restricted in their activity, not to mention that students will not be returning this semester, and they provide a lot of business.  In short, the city will face sever budgetary problems as the now occurring recession proceeds.  It is not only Harrisonburg that faces this problem, but probably just about every state and municipality in the United States.

Obviously this is currently low on the priority list of most people, and while Congress has now voted for a stimulus bill that will help out indiviuals and businesses, and another may be on the way, so far there  has not been a whisper regarding a likely need to help out state and local governments, who, after all, contribute more to the US GDP (and employment) than does the federal government, which mostly just ransfers money, except for the DOD in substantial terms.  The problem is that unlike the federal government, nearly all state and local governments face balanced budget rules for their current activities, with most needing to pass bond referenda for specific projects in order to borrow money.  So when the revenues fall short, which they shortly will start to do for all these state governments, they will face the choice of cutting spending and laying off workers or raising taxes on populations facing sharply reduced incomes and employment.  The sooner the federal government recognizes this and starts to do something, the better, although probably for now natonal politicians are hoping this will all be over before too much damage happens to the local governments, to the extent they are thinking about this at all, which I doubt.

I note that in the Great Recession, this problem was recognized, and the 2009 fiscal stimulus plan by Obama included as about a third of its spending the distribution to state and local governments of revenue  sharing.  This did help out their  problems that arose at that time.  Doing so again I think would be wise, but again, for the moment this problem is under the radar at the national level.

Barkley Rosser

8 comments:

Jerry Brown said...

Yep. Eventually the feds will realize they have to spend and they (we) will do it. And it actually quite easy for them to spend unlike what you or me or a state needs to do to be able to.

Anonymous said...

Barkley Rosser wrote about the terrible immorality of American sanctions on Iran in this time of international crisis, however just today the United States has added sanctions on Iran. The Chinese properly and fortunately are aiding Iran, no matter all the sanctions.

rosserjb@jmu.edu said...

I agree, Anonymous.

There is a more general problem here now. Trump has decided, as pgl put it over on Econbrowser, that he is Winston Churchill, great wartinme leader, and he at least is aware there really is a problem. But not only is he so incompetent that every time he opens his mouth the markets start falling again, but he is also now doing a lot of nasty stuff behind the scenes that nobody is paying attention to because we are now all Covid-19 all the time. So there are these new sanctions, and now David Ignatius in WaPo reports that two days in a row Trump has been making personnel changes in the intelligence establishment to install cronies with an apparent eye to purge 'disloyal" people. He now thinks he has "wartime" powers that allow him to do all sorts of things. He may not give them up, and we now have a precedent with Gov. DeWinw (R-OH) canceling (sorry, "postponing") a primary election in Ohio. He has already declared a National Emergency and may decide that this allows him to cancel the November election (or "postpone" it indefinitely). We are getting into very dangerous water here.

And, of course, crticizing him now is "politics" and therefore bad, even as he was dumping on "Crazy Joe" Biden and claiming he is more popular than Biden in Florida during what was supposedly a virus briefing (no wonder the markets were falling, along with his fake news statements about possible vaccines).

Anonymous said...

Barkley Rosser:

There is a more general problem here now....

[ Fearsome, necessarily important comment.
Thank you so much. ]

diane said...

The Fed usually targets it Open Market operations and QE operations at Treasury securities and MBS, etc. What if they bought state, county, and local government debt issues? This would free up these entities to use funds to address their economies.

rosserjb@jmu.edu said...

diane,

That is a possibility and might provee to be helpful. Given all the stress clearly coming down on the fiscal policy side, not helped by Trump having run up the buddget deficit with his ridiculous tax cut for the wealthy that many of us warned was damaging the fiscal policy tool for when we might need it with the next recession, now massively arriving, it may well be that this is an area where the Fed may be able to help take up the slack, although with all of Trump's jawboning last year of the Fed tolower interest rates even as the economy grew well near full employment, the Fed's tools have also been weakened. But this may be possible and may become necessary.

David Harvey said...

Excellent post - there will be many second or third order effects. One long term challenge that will be exacerbated by this event is state and local government pension funding and there is no backstop funding agency like the U.S. Pension Benefit Guaranty Corporation which insures participants in private sector defined benefit pension plans. The following is taken from the Urban Institute:

https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-and-local-backgrounders/state-and-local-government-pensions

"Inadequate contributions have left pension plans underfunded by at least $1 trillion and possibly by as much as $3 to $4 trillion depending on modeling assumptions"...."Most state and local government employees (83 percent of those working full time) participated in a defined benefit (DB) pension plan in 2018, and nearly all (94 percent) had access to such plans. These public pension plans typically provide pensions based on members’ years of service and average salary over a specified number of years of employment. Many members also receive cost-of-living adjustments that help maintain the purchasing power of their benefits in retirement. By contrast, in the private sector, where defined contribution (DC) or 401(k)-style plans dominate, only 16 percent of full-time workers participated in DB plans in 2018 (20 percent had access)."



rosserjb@jmu.edu said...

Reports have it that the bill being negotiated at this moment between Schumer and Mnuchin does include some aid for states and localiities, which was not in the original bill McConnell pushed that has been voted down several times now. HOw much and how it is to be given out remains to be seen, but this is an improvement.