The headlines said it all as snow-weary New England legislators and others from think tanks around the region gathered at the Lincoln Institute late last month to gauge the extent of the fiscal crisis for state and local governments – A Path Is Sought for States to Escape Their Debt Burdens , and Mayors See No End to Hard Choices for Cities, Including Bankruptcy. Senior fellow Joan Youngman filed this report on the gathering, an annual event organized by Daphne Kenyon, visiting fellow and co-author of a recent report on payments in lieu of taxes.
The legislators from all six New England states heard a panel of experts consider the fiscal challenges facing state and local governments and suggest possible solutions, Youngman says. To no one’s surprise, the news was sobering. Donald Boyd of the Rockefeller Institute of Government made clear that the road back from this recession will be a long one. This is due to the severity of the downturn, the slow pace of recovery, and the special impact on activities such as retail sales, which affect state and local revenues. Forty-eight states face lower nominal revenue than two years ago, and at least forty states have budget gaps for 2012. The most serious long-term pressure will come from pensions, retiree health care, Medicaid, and federal budget cuts.
Yolanda Kodrzycki, Director of the New England Public Policy Center, reiterated this message in her overview of economic conditions, pointing out that “job destruction” rates are declining in New England, but job creation remains sluggish, and the Federal Reserve identifies the fiscal position of U.S. states and localities as a major risk to near-term economic growth.
Bart Hildreth of Georgia State University discussed state and local government securities, another topic of intense current interest, particularly since Wall Street analyst Meredith Whitney predicted on CBS’s “60 Minutes” that there would be “50-100 sizeable municipal defaults” totaling “hundreds of billions of dollars.” Hildreth was far more sanguine, noting that municipal defaults are rare and most state and local securities are sound. In his words, Illinois is not “the next Greece.” But he stressed the real challenges facing borrowers, including “headline risk” – the effect of alarming predictions on investor confidence.
Michael Griffith of the Education Commission of the States reviewed the impact of the downturn on education spending. Once again, the issue was as immediate as the week’s headlines, as the Economist magazine considered whether challenges from China constituted a “Sputnik Moment” for the United States. Against this background, there was palpable shock among the New England legislators to learn, for example, that California districts have shortened their school year by as much as eight days as a cost-cutting measure. The urgent need to identify efficiencies and cost reductions that preserve vital services was a central theme for the day’s discussion. Connecticut State Senator Gayle Slossberg outlined an extensive effort in that state to review procedures ranging from payroll processing to nursing home operations. Former Vermont Senator Susan Bartlett described a similar project, and Jennifer Weiner of the Federal Reserve Bank of Boston analyzed the policy choices and demographic characteristics that make New Hampshire a famously low-spending state. Bo Zhao of the Federal Reserve Bank of Boston considered ways in which state aid might be better targeted to needy municipalities, an issue of particular importance when all state and local revenue sources are under pressure.
Byron Lutz of the Federal Reserve Board of Governors sounded a welcome heartening note as he reviewed the continued resilience of the property tax. Despite the largest housing market contraction since the Great Depression, property tax revenues continued to grow through the third quarter of 2010. This is in part due to “assessment lag,” and declines are likely in the future as revaluations account for reductions in property prices. But it is also due to the annual flexibility in rate-setting that provides some ability for local governments to stabilize revenues even as state taxes saw double-digit reductions across the nation. There is great variation in property tax collections among the states, reflecting the housing market, the political climate, and the legal structure of the tax.
The gathering was a mix of practical realism, cautious optimism, and respect for the seriousness of the situation, Youngman says, as the lawmakers face the most critical budget choices yet in the months ahead.