Where local government money comes from

Yesterday I wrote about local governments spending $100 billion a year on police, but I realize that I didn’t provide much context for how that fits into overall spending. Here are a few datasets from the U.S. Census Bureau’s 2011 Annual Surveys of State and Local Government Finances to provide a framework.

Local governments had revenues of $1.67 trillion in 2011, according to the U.S. Census Bureau. Here is how federal and state governments contributed to local government revenue flows:

Local governments generated $905 billion of their own revenue:

Local governments generated $578 billion of tax revenues:

Local governments generated $267 billion in fees and charges:

Local governments earned $134 billion in utility revenues:

Local governments also had $73 billion in insurance trust revenues and public employees contributed $73 billion in pension payments.

Local government spending on current operations:

Top eight local government spending categories:

Bottom eight local government spending categories:

America’s police — the third rail

For decades, conventional wisdom has said that federal entitlement programs are the third rail of national politics. Any politician advocating reductions would be penalized at the election booth.

Many vital entitlement programs like the Social Security disability program are nearly broke, but no one discusses how to reform them to make them sustainable. Similarly, at the local level, spending on police has put massive pressure on budgets. But it would be political suicide for a politician to advocate reform.

Violent and property crime rates have dropped in America, but spending on police has soared since the 1990’s. According to a 2012 Justice Policy Institute report, the declining violent crime and property arrests have been replaced with drug arrests:

The search for real budget numbers


I’m not sure anyone in muniland loves numbers more than the members of The National Association of State Budget Officers (NASBO). They are the geek squad who oversees the influx of tax and other government revenues. It’s the daily state money show.

Many state revenue reporting metrics, like the Rockefeller Institute’s, only show state tax collections and do not include other funding sources like federal monies. So it’s often hard to get a complete picture of state fiscal health. NASBO has been collecting state revenue data since 1987 and reports that 2012 saw the first decline in total state revenues. In contrast Rockefeller Institute has been reporting increasing state tax revenues for 13 quarters since 1Q 2010.

NASBO (see chart above) says that fiscal 2012 was a year of transition for states as they continued to emerge from the national recession. State general fund revenues grew 3.6 percent.

Federal policies may pose the biggest threat to states

One of the best muniland research teams, Blackrock, is out with its State of the States and Local Governments report. If you have time to read the 12-page report, you will get a very balanced roadmap of the challenges that municipal governments are facing.

The one area where I felt that the report broke new ground was its emphasis on the uncertainty that state and local fiscal processes face, thanks to the federal government. Here is what the report says (emphasis Blackrock):

Ironically, the greatest threats to state fiscal integrity are not primarily endemic fiscal matters or economic conditions, but rather, the effects of federal policies. First, capping tax exemption is a potential problem for the entire municipal asset class, although offsetting factors would certainly alleviate the impact. For states, as well as local governments, a tax cap could mean higher borrowing costs. Still, as has been the case recently, increased borrowing costs would likely translate into program reductions or cost-shifting to local governments. As stated earlier, we believe passage of the cap will be difficult in the current political environment and is unlikely in 2013.

American cities are bloated with unfunded pension liabilities

There have been hundreds of articles written about how a number of U.S. states have unfunded pension liabilities. These massive shortfalls have been researched by numerous groups, and although they differ on the size of the shortfalls, they all agree that pension liabilities are creating a troublesome drag on many state budgets. The Pew Center on the States is one of the first groups to dig down and analyze the condition of city pension funds and the promises made for retiree health benefits. Their new study, A Widening Gap in Cities, reports a mixed picture.

Cities such as Milwaukee, Wi. and Washington D.C. are prepared to meet their financial commitments to retirees (see above). Others, such as Chicago and Portland, Or. have seriously neglected their pension funds. Almost universally, cities have failed to pre-fund the commitments they have made for retiree health care. In total, cities have pre-funded only 6 percent of their healthcare promises, leaving a shortfall of $118 billion, according to Pew. In contrast, cities have funded 74 percent of pension liabilities, leaving an unpaid balance of $99 billion. In fact, 22 cities face larger unpaid bills for retiree health care than for pensions (page 16).

There are many approaches to increasing the funding for pension and retiree benefits. Pew discusses some of these approaches (page 22):

California’s budget clean-up

California narrowly averted its own fiscal cliff last week when voters approved a state ballot issue – Proposition 30 – that raised income and sales taxes. Income taxes will increase 3% for seven years on those earning over $250,000, and a supplemental 0.25% sales tax increase will take effect four years. Prop 30 is hoped to generate $8.5 billion in annual revenue and cover about half of the state’s deficit. The other half will be made up through budget cuts.

The state continues to have significant fiscal challenges, but it now has the revenue to meet its commitments through the end of the fiscal year 2013 if the economy stays on track. Fund and ETF manager Blackrock sum it up:

Following several years of fiscal stress that showcased dramatic mid-year deficits, California budgetary shortfalls have narrowed and longer-term structural balance may actually prove achievable.

The State Budget Crisis Task Force weighs in

Much as the Simpson-Bowles report aspired to be the foremost guide to reducing the federal deficit, the Volcker-Ravitch report on the state budget crisis that was released yesterday hopes to serve a similar purpose for state government spending. Paul Volcker, the former Fed chairman, and Richard Ravitch, who helped New York City work itself out of bankruptcy, led the State Budget Crisis Task Force, the group that produced this report. The task force also included two former U.S. Treasury Secretaries as members. The bottom line of the report is that there is less money to go around and that states should become better managers of the shrinking economic pie:

The United States Constitution leaves to states the responsibility for most domestic governmental functions: states and their localities largely finance and build public infrastructure, educate our children, maintain public safety, and implement the social safety net. State and local governments spend $2.5 trillion annually and employ over 19 million workers – 15 percent of the national total and 6 times as many workers as the federal government…

…States are grappling with unprecedented fiscal crises. Even before the 2008 financial collapse, many states faced long-term structural problems. Many economists believe that in the aftermath of the crisis, the economy will grow sluggishly for years as it works off the excesses of the credit and real estate bubbles and endures slow employment growth. Tax revenues are recovering slowly and remain well below their pre-crisis trends.

Massachusetts sets the bar for transparency

For openness in finances, debt management and budget process, Massachusetts is the gold standard among states. The legislature and executive branch have collaboratively embraced a five-year budgeting process and committed to sharing the results with taxpayers and the public. Because of the state’s efforts to reach out to the investing community, I predict that its transparency will lead to lower borrowing costs and more stable funding sources in the future. The state is rated AA+ by credit rating agencies for creditworthiness, but I’ll assign it the highest rating, AAA, for transparency.

Several weeks ago, the state treasurer, Steven Grossman, launched a new Twitter account (@BuyMassBonds) that keeps the public informed about new financial filings and bond offerings. It’s a model of excellence for muniland in terms of keeping municipal bond investors informed through social media. Here is a recent tweet about an upcoming bond issue, the Massachusetts Water Pollution Abatement Trust State Revolving Fund Bonds:

Christie wants to cut taxes while the cashbox is empty

New Jersey Governor Chris Christie got a lot of media attention this week when he announced that Warren Buffett “should just write [the government] a check and shut up,” on CNN’s Piers Morgan Tonight. His great one-liner obscured the more profound question he was being asked, which was: Shouldn’t the wealthy pay a higher proportion of taxes? Beliefs about progressive taxation vary widely, but income taxes at every level of government are structured so that the wealthy pay a higher proportion of taxes.

If I had been asking the governor questions, I would have focused on his fetish for cutting income taxes when his state’s cashbox is nearly empty. Or as the rating agency Standard & Poor’s defined the problem:

New Jersey Gov. Chris Christie released his proposed $32.15 billion budget for fiscal 2013 on Feb. 21. The budget remains structurally unbalanced, is built on what Standard & Poor’s Ratings Services regards as optimistic economic projections to close the budget gap, and increases New Jersey’s (AA-/Stable) reliance on nonrecurring revenues.

Republican fiscal conservatism is a myth

Government has expanded tremendously at every level in the United States over the last several decades. Expenditures have risen; constituencies have gained new subsidies; and loads of debt has been taken on. It’s unstable and it’s time to go on a diet.

The Republican party declares that they are the party of fiscal conservatism which has been beating back the profligate Democrat party. Here is the war cry from their 2008 party platform:

The other party wants more government control over people’s lives and earnings; Republicans do not.  The other party wants to continue pork barrel politics; we are disgusted by it, no matter who practices it.  The other party wants to ignore fiscal problems while squandering billions on ineffective programs; we are determined to end that waste.  The entrenched culture of official Washington -– an intrusive tax-and-spend liberalism -– remains a formidable foe, but we will confront and ultimately defeat it.

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