U.S. state and local finances in big double-dip risk

July 7, 2010

U.S. state and local finances have become truly alarming. At $144 billion the combined budget gap this year for the 50 states is higher than the $133 billion of the previous year. What’s more, last year’s federal stimulus funds, which helped mitigate the gap, will end by December. Since their finances are highly dependent on the economy, if the recovery slows or double-dips, states and local governments could suffer more pain than any other player save the long-term unemployed.

Much of states’ current budgetary problems result from bad decision-making. According to a Federal Reserve Bank of San Francisco study, if California and Oregon had kept per capita state expenditures and taxes constant over the past three years, both states would have had budget gaps for the current year of about 20 percent of state spending. In practice, California continued to increase spending, while Oregon imposed substantial tax increases and restrained spending. Consequently California’s actual 2009-10 budget gap was 37 percent of state spending while Oregon’s was 7 percent.

Both states and localities have economically sensitive income sources. For states, sales tax yields depend directly on spending, while corporate and personal income tax yields are leveraged, falling faster than the economy in recessions. Total state income fell 11 percent in the four quarters to June 2009, the worst drop since World War Two. Local property taxes depend largely on the housing market. State and local spending on law enforcement and education do not fall in recessions, while unemployment, Medicare and Medicaid benefits vary inversely with economic activity.

In most cycles, energetic economic recovery rescues state finances although state budgets typically lag — for example the budget gap peaked in 2004 after the 2000-01 recession.  However, given their poor current position, if today’s recovery is sluggish or even “double-dips” state and local budget-makers may find it impossible to cope.

At the municipal level, bond defaults may soar well beyond 2009′s $6.4 billion — the most since 1992. State bankruptcy is technically impossible, and draconian action, like Governor Chris Christie’s budget cuts in New Jersey, may postpone crisis. But if recent fears about a double-dip prove correct, it won’t be long before the first state bond default since Arkansas in 1933 rears its ugly head.

Comments

Prescient and pertinent piece. The Obama administration’s stimulus activities seem to be either doomed to produce a dip when they stop (cash for clunkers) or tread water through underestimating the size of the problem (homeowner mortgage relief).
At the same time, it’s hard to see who’s controlling (or even worrying about) the deficit.
I increasingly wonder if this is going to be a one-term Presidency.

http://nbyslog.blogspot.com/2010/07/us-p roperty-shock-as-obama-homeowners.html

Posted by nbywardslog | Report as abusive
 

Prosperity is right around the corner…

Posted by mckibbinusa | Report as abusive
 

‘But if’,'may’, ‘could’, ‘might’, ‘possibly’, ‘if’ – this article is riven with such auxiliary verbs, rendering the whole composition worthless. The media is apparently determined to frighten everyone into believing a double dip recession is imminent, all without actually saying so, all to feed its need for ‘content’, the more dramatic the better. It brings to mind W.R. Hearst’s instructions to his photographer – send me the pictures and I’ll provide the war. Shame on you all.

Posted by Gotthardbahn | Report as abusive
 

Throw in the politically inconvenient fact that real under/unemployment is 20%, people who can are increasing savings back up towards 5-7% from 0, and those remaining who have no economic responsibility have still had their piggy bank smashed.

Know anyone still able to take out a home equity line of credit?

Posted by ArmisticeX | Report as abusive
 

@Gotthardbahn

It’s called free thinking and free speech, and some people believe it has value.

Posted by yr2009 | Report as abusive
 

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