State and Local Budgets Hinge on Economic Recovery

Article excerpt

As spring inched toward summer, sinking revenues and rising demand for services weighed on local and state governments across the Southeast. Residential and commercial property values have stagnated or fallen, unemployment is up, and worried consumers and businesses have reduced spending. Like a kink in a garden hose, those nasty economic realities have pinched the largest revenue streams that feed the Southeast's states and municipalities-taxes on income, real estate, retail sales, and property sales.

State and local governments in the Southeast, like those in the rest of the nation, are facing difficult budget choices as the economic recession continues to take a toll on important sources of government revenue. Several states braced for further budget cuts at public universities. Counties and cities across the Southeast closed libraries. Georgia whittled dollars from a scholarship program for high school valedictorians, and state departments left vacant jobs open. Southeastern cities laid off and furloughed employees, even police officers. Atlanta's $4 billion water and sewer system overhaul was imperiled as the city's credit rating hovered just above junk-bond status.

Most U.S. states--including all six Southeastern states-have constitutional or statutory requirements to balance their budget, and most of these states are prohibited from carrying over a deficit into the next fiscal year, according to the National Conference of State Legislatures. Faced with these restrictions, every Southeastern state and many cities and counties have been forced to either increase taxes and fees--a dicey political proposition when many citizens' finances are hurting--reduce costs and services, or draw on reserves. Most have drawn down rainy day accounts and cut programs while, to a lesser degree, increasing fees and taxes on items such as cigarettes.

As bleak as the fiscal picture looks for the region's state and local governments, some short-term relief could be on the way--the American Recovery and Reinvestment Act of 2009, the federal economic stimulus program. Florida, for instance, plans to use about $3 billion of Recovery Act funds to help make up some of its $5 billion-plus budget shortfall for the July 2009-June 2010 fiscal year, according to the state.

After stimulus grants are spent, however, the fiscal health of Southeastern states will depend heavily on the strength of an economic recovery, said Navnita Sarma, a Federal Reserve Bank of Atlanta economic research analyst who tracks state government finances. A powerful, rapid rebound would quickly generate higher sales and income taxes, and presumably, though more gradually, strengthen property values and thus property tax revenues that are vital to local governments. In a tepid recovery, tax collections would rise more


"The states are all tightening," Sarma said. "They're looking at every component of their budgets. How their economies recover will have a huge effect on their fiscal outlook."

Government work feeling the pinch

Federal, state, and local governments are a significant part of the Southeastern economy. At the end of March, the region's 3.28 million public sector jobs accounted for 17 percent of nonagricultural employment, according to figures from the U.S. Bureau of Labor Statistics (BLS).

And so far, at least, jobs in the government sector have been more secure than jobs in the private sector. In the 12 months through April, while overall nonfarm employment in the Southeast declined 4.2 percent, by 843,500 jobs, government employment nudged lower by only 0.04 percent, or 1,400 jobs, according to BLS data.

Public sector employment declined from April 2008 to April 2009 in Alabama, Florida, and Georgia and increased slightly in Louisiana, Mississippi, and Tennessee. Meanwhile, every state lost private sector jobs during the same period.

While federal stimulus funds should salve some of the immediate fiscal pain, determining the longer-term implications of budgetary problems for the Southeast's governments is difficult, Sarma said. …