Fixed costs squeeze state and local government hiring
I’ve said for several years that hiring by state and local governments is unlikely to rebound after the declines following the 2008 recession. Governments have been faced with increasing costs for Medicaid, pension and retiree healthcare, which are fixed in law and through contract negotiations and are therefore difficult to adjust. The most viable way for governments to balance their budgets was initially through layoffs; now it’s through hiring freezes. Employment data from the Federal Reserve Bank of St. Louis proves this point:
As service providers, state and local governments spend a sizable share of their budgets on personnel costs. In fiscal 2011, Census Bureau data show that 37% of spending on current operations went to wages and salaries. By accounting for such a prominent portion of governments’ spending, staffing reductions became a central component to state and local government cost-containment strategies. Outright workforce reductions as a way to lower personnel costs also faced fewer legal hurdles than did reducing current or deferred compensation and benefits.
Payroll positions in the state and local sector peaked in August 2008. But beginning in September 2008 and through January 2013, state and local governments would go on to slash 744,000 positions, or 3.8% of total employment in the sector. Although state and local government employment may have troughed early in 2013, restoration has been slow and uneven. To the extent job gains have occurred, they have been among the states, as opposed to local governments.
Compared to local governments, state governments have a much easier time raising taxes and fees. Often local governments must get permission from state legislatures to raise property, income or sales taxes, an arduous process. Local governments more often resort to laying off employees. More from S&P:
In the 58 months from September 2008 through June 2013, states cut their workforces by 3,100 per month and 189,000 in total. But since the start of fiscal 2014 (in July 2013), they have reversed course, adding an average of 3,400 payroll jobs per month through March. Just since July, therefore, the states have replaced 21% of the positions they had previously eliminated. In contrast, local governments have been more reticent.
In the 59 months from August 2008 through June 2013, local governments cut 9,500 jobs per month. Since June 2013, they have restored only 3.7% (2,300 per month) of the positions they had previously cut. Slower job growth at the local level has macroeconomic implications since local governments account for 73% of total state and local government employment.
According to a new research paper from the Federal Reserve Bank of Boston, the long-term picture for muniland is not very bright. American City and County magazine describes how the Boston Fed is measuring long-term sustainability for state and local governments:
By looking at a new measure of state and local government fiscal sustainability (known as a “trend gap”) analysts for the Federal Reserve have demonstrated the discrepancy between long-term governmental obligations and income has been growing for the past 30 years. Unless this gap is closed, state and local governments can expect to raise taxes, cut social services and see credit ratings suffer.
The fixed and rising cost of Medicaid, pensions and OPEBs will continue to put pressure on state and local government budgets, and suppress municipal employment. Governments are trying many approaches to lower these fixed costs, but they can only achieve progress in small steps. Reducing employment and hiring freezes will continue to be the easiest way to balance budgets