Feds, States, Cities: In One Fiscal Boat

By Peirce, Neal | Nation's Cities Weekly, October 13, 2008 | Go to article overview

Feds, States, Cities: In One Fiscal Boat


Peirce, Neal, Nation's Cities Weekly


For many years, official Washington--its own "echo chamber," as some say--has been ignoring the financial needs and prospects of state and local governments.

That era is now coming to a crashing end.

The headline event is Gov. Arnold Schwarzenegger's appeal to the U.S. Treasury for an emergency $7 billion loan to cover California's immediate operating expenses. Massachusetts has submitted a request too.

The Wall Street fiscal crisis effectively shut the state-local government sector out of borrowing--either for long-term bonds or, of more immediate gravity, bridge loans to keep them afloat awaiting sales tax and April income-tax receipts.

But the stage for a "perfect fiscal storm" was already set by the seriously weakened fiscal condition of so many state and local governments. On top of the stunning $43 billion in prospective deficits that 29 states had to cover with spending cuts or tax hikes for the fiscal year starting July 1, at least 15 of the states have already seen serious new budget gaps emerge, reports the Center on Budget and Policy Priorities.

Indeed, versions of California's budget crisis are being registered from Georgia to Arizona, Florida to New Jersey to Ohio. In New York, epicenter of the financial earthquake triggered by Wall Street's complicity in the mortgage foreclosure mess, fears of massive layoffs by financial houses are expected to add $1 billion or more to the $5.4 billion deficit the state already faced.

State-local taxes will surely have to rise: by global standards, we're in fact a relatively low-tax nation. And the financial wizardry that helped trim bond-sale costs in recent years is likely toast--we'll see a return to plain-vanilla bonds with fixed rates of interest.

Then there's the impact of the stock market plunge on state and local pension systems with their estimated $3 trillion in long-term liabilities. The funds' expected investment returns of roughly 8 percent are now wildly unrealistic. Unfunded liabilities, notes John Petersen of George Mason University, a senior analyst of state-local fiscal systems, "will probably grow exponentially."

The often-ignored reality, says Petersen, is that state and local budgets are 12 percent to 13 percent of the entire national economy. "In the last (2000-01) recession, they held up because property taxes were doing well. But now it's the fatal storm--everything is going down. It's a 9/11 for government finance."

Yet there may be something of a silver lining, Petersen suggests: "This financial--and now fiscal--crisis means we're all in this together. We will need strong government--federal and state-local--to lead us."

Nationally, that's already clear. The federal bailout of major banks, insurance companies and mortgage lenders proves free-market fundamentalism doesn't work, that careful and thorough government regulation and oversight are imperative. …

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