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Focusing On Crumbling State And Local Budgets
By now, everyone is well-aware the US, as the Federal level, is insolvent, and continues to exist merely thanks to 1) the ability to print money and 2) having the world's reserve currency for the time being. Yet more and more are focusing not only on the calamitous, and even more bankrupt, state fiscal picture, but increasingly so on the smallest bankrupt quantizable element: local governments. The following surprisingly objective note from Goldman's Alex Phillips separates fact from propaganda in this increasingly more critical discussion, now that the question of how soon the administration will need to provide state bail out funding reaches critical mass.
From Goldman's Alec Phillips:
- States reported a year over year gain in revenues in the first quarter, the first since Q3 2008. However, while the revenue trend is stabilizing, excluding tax increases enacted over the last year would turn this gain into a continued (albeit smaller) decline. Moreover, states face potential disappointment from Washington; the majority of states assume additional fiscal aid that Congress looks increasingly unlikely to provide, potentially adding another $25 billion to the savings will have to come up with in the coming fiscal year that starts next month.
- While the state revenue trend is at least beginning to stabilize, the local sector may be moving in the other direction. Local revenues lag state revenues, as they rely more on property taxes which react to the economic cycle with a greater delay. In addition, localities face pressure from the states themselves, some of which may shift costs from their budgets to localities to close their own gaps.
- The consequence is that local governments, which are not tracked nearly as closely as state government budgets but make up roughly 60% of the state and local sector, will continue to cut spending despite tentative improvement at the state level. Apart from the effect on overall state and local activity, the shift of fiscal pressure is likely to put the emphasis on cuts to different segments of spending (fewer cuts to income maintenance programs, more cuts to education).
- Our preliminary estimate is that nonfarm payrolls fell 100,000 in May, with a 150,000 gain excluding Census workers. We expect a one-notch increase in the unemployment rate to 9.8% and a 0.1% gain in average hourly earnings.
State and local sector spending has been a weak spot in the recovery, with real spending down 1.7% since the recession trough, the only instance of a real decline at this point in the recovery. This has been largely driven by significant revenue shortfalls at the state level, which as a result of balanced budget requirements have led to spending cuts of a similar size. From 2009 to 2013, state budget officers estimate revenue shortfalls of roughly $560 billion, with $125 billion of this occurring in the coming fiscal year. While part of this estimated shortfall relates to assumed spending increases (to fund health and other programs that face consistently rising costs), part of this also reflects an assumption of continued revenue declines. Only a fraction of this shortfall will be made up through federal fiscal aid to states.
The most recent reports from states indicate that the revenue picture has improved. However, there are a number of caveats, some with negative implications for the local level of government, which actually makes up the majority of the state and local sector:
1. State tax collections are up year over year for the first time since 2008… According to the Rockefeller Institute, state tax revenue in Q1 2010 was 2.4% greater than in Q1 2009. This represents the first year over year increase since Q3 2008.
2. …but legislated tax increases appear to account for more than all of the improvement... State legislatures increased taxes and fees by an estimated $24bn in state fiscal year 2010, which ends June 30, or $6bn per quarter if we assume equal distribution across the year. Removing this effect puts underlying revenues down 2.1% in the first quarter. Legislation boosted sales tax revenue by about 3% and personal income tax revenue by around 4.5%.
3. …and federal aid may come up short of projections, resulting in additional state shortfalls. The Senate has been debating the addition of another $25 billion in funds to the $150 billion in state fiscal assistance that Congress approved last year. Originally, this was proposed to cover the second half of the upcoming state fiscal year, i.e. January to June 2011. The majority of states have assumed in their budgets for the upcoming fiscal year (i.e. the year that begins next month) that Congress will extend this aid. At the moment, the best case scenario for states is probably less than they were expecting—the latest Senate proposal would provide only $17bn in additional federal transfers in the first two quarters—and there is a clear possibility that state aid will be struck from the bill entirely before the debate is complete, due to growing concerns in Congress over the federal budget deficit. If so, this would result in states facing a greater budget gap yet to close in the coming fiscal year—at around $115 billion (shown in the chart below as the sum of "fiscal aid under debate" and "estimated"—than in the fiscal year that is about to end (which state estimates put at about $110 billion, not counting the portion of the gap that was closed with state fiscal aid).
4. As state revenues stabilize, local revenues may come under greater pressure... County, city, and other municipal governments, which together account for the majority of spending in the state and local sector, rely heavily on transfers from state governments and property taxes, which together comprised nearly 60% of local revenues in 2007 (the most recent year for which data are available). So while state revenue changes tend to lag the economic cycle, the local level is likely to lag even more, as shown in the chart below. The trend in this cycle is likely to be more pronounced than in prior episodes, as the state fiscal shortfall has been worse (increasing the potential severity of cuts to support for local governments) and house prices have clearly declined much more than in prior recessions (gradually lowering property tax assessments in some areas).
5. …and states may balance their budgets on the backs of local government. Although state governments are likely to see revenues improve ahead of local governments, on average, they are also likely to diverge from local government by pulling back on transfers to municipalities. In previous recessions states have transferred various health responsibilities to local (usually county) governments, and increased cost sharing ratios for children’s health and several welfare programs. In the current cycle, some states have begun to debate similar activity. The level of state support for local government varies significantly among states, however. For instance, counties in California receive more than half of their funding from the state government; nationally, the average is about one-third. Although there is no national tally of how much of the state shortfall has been closed by shifting it to the local sector, this appears to be a common strategy in a number of states. The budget being debated in California, for instance, would increase local funding requirements by an estimated $4 billion (roughly 20% of the state's budget gap).
6. As fiscal pressure moves to localities the composition of spending cuts and tax increases will change. Like states, most municipalities face some kind of requirement to balance their general funds, so revenue shortfalls will be met with spending cuts or, to a lesser extent, tax increases. As shown in the table below, state governments tend to spend disproportionately on welfare programs, and also usually bear primary responsibility for Medicaid programs. By contrast, localities bear most of the responsibility for education spending. On the tax side, relieving some of the pressure on state governments is likely to reduce the possibility of sales and income tax increases, which are collected mainly at the state level. While it should in theory increase the likelihood of property tax hikes, given that this is how localities collect most of their tax revenue, localities seem less likely to pursue savings through property tax hikes—though a few have already—given the fragile state of the housing market (and the political sensitivity to housing-related issues).
Composition of State vs. Local Budgets
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A good solution to fix the bankrupt states would be to just delete the GPS location like they did in the Simpsons movie of those states.
No more state, no more problem.
GoM states, no more. GA and Carolinas in 2011 when the tarballs and stench roll in. Forget about ppm in that water - peeps just can't resist their native beaches. That's too much of a mind job.
last one out, turn out the lights
Are you not sick to death about states crying 'broke'?
Here is my asinine plan for recovery:
Step1)
Quantify your total assets and liability, yes that includes the hidden ones.
Step 2)
Sell off your assets to settle your liabilities.
Step 3)
Resign in disgrace.
And not necessarily in that order!
The various beasts are starving. They will therefore resort to cannibalizing revenue from one another. When that isn't enough, they will finally eat what is left of the taxpayer.
I keep getting harrassed by various states for "unpaid" taxes... desipte documentation to prove otherwise. No wonder they're bankrupt; can't do basic accounting.
Postal: This is an old trick states resort to when revenues are squeezed. They send out fictitious delinquency notices and hope a certain percentage of suckers pay up.
Oh, I know why they do it. The problem is, my job requires a security clearance. Being reported as a tax delinquent tends to delay/complicate the situation. It's highly annoying that I have to waste my time to "prove my innocence" because the state can't balance their budgets.
The problem is, my job requires a security clearance.
Here's a suggestion. Get a new job. Stop feeding the beast.
Hey... me too!
California sent me a notice that I owe them $200 in back taxes -- plus about $4000 in penalties and interest! All for fiscal year 1994! Aw hell... I don't have any paperwork for 1994 anymore... that was 16 years and 3000 miles ago!
Happened to a buddy of mine. "I was 25. And the woman on the phone chuckled that my credit score is ruined. Twennnty five!"
check the statute of limitations.
I don't believe they have the legal right to pursue that debt or screw up your credit report.
They did enough accounting to institute an 1% income tax on all individuals who DON'T work in the village.
Sounds unlawful to me.
Exactly.. Maricopa County, and the Cities are usually on budget.. but the state is a huge black hole sucking all the dollars into it.
But we get to pay an extra 1% sales tax for the children! Don't worry, its temporary.<sarcasm off>
Funny thing is, my neighbor is a teacher and wrote an editorial saying that AZ shouldn't pass the sales tax bill because it was a waste and would do nothing to help the schools here. AZ state has no sort of budgeting skills though, so since the bill got passed, they will get an extra 100 million dollar slush fund that they can drain.
Delinquent Mortgages Vs. Unit Sales:http://thenewmortgagecompany.files.wordpress.com/2010/06/10-key-charts-delinquent-for-sale-sold-1999-to-2010-05-text-by-housingstory-net2.png
Does this mean that all of the "green shoots" and "nascent recovery" rhetoric from the politicians and media members is just a...........lie? Say it ain't so, Joe!
"Say it ain't so, Joe!"
Sorry, I can't do that. I've been screaming the opposite since 2008!
My village of 2,000 is over $330K in the hole. Just two years ago there was a budget surplus of over $500K a year. Opps......
Looking at their budget makes me laugh. Good news is there are a lot more police officers with upgraded tactical weapons, SUVs, stun guns, and police dogs. My little village needs it too with all of those yuppies living amoungst the nursery land. McMansion inhabitants feel safer when the police ratio is 1 police for every 20 residents I guess.
The bad news is that if you give them all those toys they're gonna want to use them.
The real bad news is that they may need to use them soon. Against other little villages coming to plunder...
This is true. I was the only village idiot at the last council meeting. This meeting happened right on the tail of the Ohio Supreme Court decision that officers no longer needed to have a radar readingto issue a speeding ticket. Council was excited about the Police Chief's remarks that we will be cracking down on speeders and this should help the budget. Council smiled eagerly and clapped in agreement. Funny thing is that the Police Chief didn't care about the complaints of residents about pot growing in the common areas of the development. Reason? The village would be billed to imprison the reponsible party, as the village only has a holding cell.
The stun guns will be used in my village when I encounter a "speeding violation" like I did here - www.youtube.com/watch?v=443LDl7sy9s
"...more police officers with upgraded tactical weapons, SUVs, stun guns, and police dogs"
Ahh, the eternal lure of municipal boy toys....
You have a real inside view.
Isn't is amazing how they simply cannot add and subtract? Multiplication math would tax their capabilities beyond breaking.
Maybe States can jingle mail all the keys to the cities back to Washington DC?
As for the motives allowing the US to continue existing I wouldn't neglect nuclear arsenal as #3 either...
Having the biggest and sofisticated military apparatus of the known world surely makes a difference toward, say, Greece, for example. :)
It just got much, much worse... or better:
http://news.mobile.msn.com/en-us/articles.aspx?afid=1&aid=37904586
Hospitals are canceling hip replacement surgeries if you are on medicare. They can't get the manufacturers to reduce the metal hip by the 21% the .gov now requires. Grandma needs to get on the phone and start screaming to her Congress-critter.
From Bloomberg:
http://www.bloomberg.com/news/2010-06-25/states-of-crisis-widen-as-46-go...
Modest proposal to reconcile State budgets:
Let prisoners out of jail with agreement to work for the State Gov for a period equal to the original sentence at 90% of minimum wage. Lay off corresponding number of employed workers.
But what to do with all those empty cells! I could name a few folks to occupy them... Of course none of them have any useful skills so the new license plates will look like hell.
+100
+100
Another big problem not examined here: the role bonds played in local infrastructure. Since bonds are usually paid first after education, budget options become more limited.
Additionally, many localities used infrastructure for collateral- roads, municipal buildings, etc. If they can't pay the bonds- you may end up living on a private drive with a toll or building with an entry fee.