The Coming Fiscal Crisis Of State And Local Governments

Yves here. The collapse of highly taxed hotel stays, restaurant and bar business, and retail sales is on track to be an even harder blow for state and local governments than the financial crisis. The Obama Administration revived on a temporary basis, revenue sharing, a program created by that great American socialist, Richard Nixon.

Readers have already taken note of this looming problem.

By Barkley Rosser, Professor of Economics at James Madison University in Harrisonburg, Virginia. Originally published at EconoSpeak

Yesterday my wife Marina and I mt with our personal attorney, a close friend also, to fix some loose ends in our wills due to some recent family deaths, as well the current situation. He also happens to sit on the Harrisonburg City Council, as well as having been Mayor for awhile and a longtime member of the city Planning Commission, someone whose competence we have great respect for. Anyway, he noted that on April 14 the City Manager is to present a proposed budget to the City Council, and that it will have a giant hole in it given that taxes on restaurants are a significant source of revenues for the city, and while not completely shut down, restaurants are now seriously restricted in their activity, not to mention that students will not be returning this semester, and they provide a lot of business. In short, the city will face sever budgetary problems as the now occurring recession proceeds. It is not only Harrisonburg that faces this problem, but probably just about every state and municipality in the United States.

Obviously this is currently low on the priority list of most people, and while Congress has now voted for a stimulus bill that will help out indiviuals and businesses, and another may be on the way, so far there has not been a whisper regarding a likely need to help out state and local governments, who, after all, contribute more to the US GDP (and employment) than does the federal government, which mostly just ransfers money, except for the DOD in substantial terms. The problem is that unlike the federal government, nearly all state and local governments face balanced budget rules for their current activities, with most needing to pass bond referenda for specific projects in order to borrow money. So when the revenues fall short, which they shortly will start to do for all these state governments, they will face the choice of cutting spending and laying off workers or raising taxes on populations facing sharply reduced incomes and employment. The sooner the federal government recognizes this and starts to do something, the better, although probably for now natonal politicians are hoping this will all be over before too much damage happens to the local governments, to the extent they are thinking about this at all, which I doubt.

I note that in the Great Recession, this problem was recognized, and the 2009 fiscal stimulus plan by Obama included as about a third of its spending the distribution to state and local governments of revenue sharing. This did help out their problems that arose at that time. Doing so again I think would be wise, but again, for the moment this problem is under the radar at the national level.

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  1. Samuel Conner

    This is perhaps an example of the “broader classes of assets than in prior rounds of ‘unconventional monetary policy’ ” that the Fed might be able to purchase to ease the crisis, in the absence of decisive action from Congress and the Executive Branch. The loans could be “forgiven” at a future time through appropriations for that purpose.

    And that might even be a step in the direction of what in effect could be, in effect, fiscal policy pursued by the Fed (purchase of infrastructure funding bonds — though how the work would be done in the context of a national lockdown is another question)

    But the states still have to work around their, in many cases constitutional, budget constraints to be able to receive such help. I wonder how many have “exceptional circumstances” escape clauses in the wording of their legal constraints.

  2. Christopher Tobe

    Kentucky State & Local Governments were already in crisis due to unfunded pension mandates & excessive fees. City and County governments passed legislation in the house let week, to Free CERS their plan from the 11% state fund which had taken money from them in a variety of ways including via commingled offshore Private Equity partnerships. Wall Street will try to kill this in the KY Senate because the un mingleling of the partnerships will uncover a lot of corruption. Stay tuned

    1. Joey

      Indeed, on my run up Bardstown Rd in Louisville yesterday, I noticed the shuttered restaurants still had their ‘stop the restaurant tax’ signs up. Mayor Fischer hasn’t announced his new fiscal solution. State Courts have already disallowed renegotiation of the police and fire pensions, which alone are under enough water to overwhelm the budget, which assumed normal local business income.

      There has to be a new deal level intervention to save the economy already, and we haven’t even made it out of the gate in the covid battle.

  3. Wyoming

    How difficult is it for local governments to get exceptions to this balanced budget requirement? Are there exceptions built into the laws/reg which take into account natural disasters and such?

    1. Adam Eran

      Currency users (households, states, local governments) of necessity need balanced budgets. Currency creators (monetary sovereigns with fiat currency and floating exchange rates) are fiscally unconstrained. The federal government can spend anything it needs any time it needs to, regardless of tax collections. After all, where would people get the dollars to pay taxes if government didn’t spend them out into the economy first?

      The other alternative would be public banking. State or local public banks could provide a line of credit to navigate temporary shortfalls like COVID-19

      1. Clive

        If we can pay for Middle East wars,plus military aid to the richest per capita nation there, build runways in Africa etc– then we can pay for M4A.

        1. Altandmain

          We can. The problem is that the ruling classes don’t want to pay for anything that benefits ordinary people.

  4. Shiloh1

    You can observe a lot by just watching. The two village hall parking lots by me are still as full as ever, so everyone there must be “essential”. Neigh danger of any property tax reduction, I’m afraid.

    1. johnf

      You neglect the longer term. At the very least, the village needs to retain their administrators, so that they are ready and not caught out, when they again have much to administer. :)

  5. Christopher Tobe

    Our last governor Bevin via unfunded pension mandates stripped $35 million or around 450 nurses from County Health Departments the front line in Kentucky on the Corona Virus. The current Senate Budget last night wants to cut $24mm more from County Health depts as our R super majority does not believe the virus is serious.

  6. Mel

    I read that in Canada, in times past, the Bank of Canada was in fact the governments’ bank, at all levels. Provincial and Municipal governments could take out loans from the BoC to fund their projects — infrastructure, whatever. One of the Pierre Trudeau governments stopped this policy, so that lower governments would go to the private banks for funding and provide those banks with the income stream.
    I haven’t followed this up yet. Maybe I read it here, from another commenter.. if so, anonymous hat tip, whatever that’s worth.
    Definitely a point worth remembering about public banks. Probably the FED’s nature and charter inhibits it from doing this kind of thing.

  7. Wukchumni

    April is the cruelest month and more so this year, as property taxes that counties count on come due on the 10th, just as the virus will be peaking.

    Surely a moratorium will be called on not paying these, but how do you make up for the lost income that keeps counties going, other than Big Gov making them whole?

    1. redleg

      The virus won’t peak until early summer. It’s all math at this point, and somewhere in June is where the bell curve tips over.

  8. Jim A.

    Plus increased costs for unemployment benefits and other safety net programs, decreased revenue on mass transit systems, the balance on already underfunded pension plans going into the toilet, and a dozen other things I haven’t thought of.

    1. Dirk77

      After reading the Imperial College study that’s been circulating, my thought was that the much maligned initial UK gov plan, called “mitigation” in the study, will turn out to be closer to “best” than any other. But that is all in the past now I guess. For the reasons given, revenue sharing should be a no-brainer. The hit even a healthy local gov like mine is taking is a lot. Perhaps they will start taxing the Airbnbs and Ubers more after this pandemic is over.

      1. Anon

        The problem with British “Herd Immunity” plan is that much of the organization/function of their society would begin to fail before “immunity” triumphed. It also assumes that the current virus doesn’t mutate into a disease that affects the younger members of society.

        The “flatten the curve” option has risks, too. Economic activity will dive. But at least there are some options for mitigating the downturn. A medical downturn is also costly; and for some terminal.

        No one knows whether the future will be bright or dark, but I imagine for those surviving it will surely be different.

        Finding an effective vaccination is our best hope.

        1. Dirk77

          Yes. I thought as extreme measures only, mitigation seemed better. No nation/state/city is going to go the suppression route until a good vaccine becomes available unless it’s real soon. It’s like holding your breath. And no one is going to go the mitigation route at the start bc we all remember the Kodos the Executioner episode from Star Trek. I would think whatever people do, the emphasis should be on being fair because, as you say, no one knows how things will turn out.

  9. jefemt

    Meredith Whitney called this decades ago and was roundly condemned to sit in her corner holding a piece of paper against the wall with her nose. Meredith Who?

    I live in a State with no sales tax, a few towns have local option resort taxes.

    Only the Federal Gub-Mint can print money.

    The notions of austerity, MMT, and Political Will will all be tested in a very big way. Full Faith and Credit.

    Discussion on N C regarding Trump becoming the next FDR are quite a compelling thought-exercise.
    I am still betting on Corporations and Bankers tipping the table toward their pockets.
    Old habits die hard.

    1. Massinissa

      It could go either way. I worry about people becoming too attached to specific narratives, when we really have no idea what Trump will finally decide to do. Will be be FDR? Huey Long? Mussolini? Bolsonaro? Literally anyone else? We have no idea.

        1. Dirk77

          Tulsi? Really? That’s a puzzle for later. He will be getting my vote anyways if Biden wins.

    2. Dan

      I am still betting on Corporations and Bankers tipping the table toward their pockets.

      It’s obvious right now that that is what’s happening. It’s almost as if the whole thing is being engineered from behind the scenes. Full spectrum dominance and debt servitude for life are the endgame.

      Go ahead, cue the tin foil hat stuff. I don’t give a family blog. I’m frankly amazed at the naivety of the majority here.

  10. Ian Ollmann

    You know, if my local government was willing to forgo property valuation increases for a number of years or at least let me pay in advance at current rates, I would happily pay my property taxes several years in advance. That could add up to a lot of cash.

    1. Ian Ollmann

      If only the GOP hadn’t capped my State and Local income tax deduction, I could do it just to get full credit for the expense over the standard deduction.

      And the GOP slides in for another win.

  11. jackiebass

    This is one area where trickle down works. When the federal government has money problems it isn’t long before state and local governments will also have economic problems. You need to only look at our economic history to see this. Because of the way state budgets are structured it is even harder on states than the federal government. Most of my history comes from living it, not from a text book.

    1. Bill J.

      The Federal Government can’t have “money problems” only available resource problems. If Federal Dollars aren’t available for something that’s because a political CHOICE has been made to keep it that way.

  12. Larster

    Not mentioned is thecoming slide in property values, which will crater property tax revenues. This will obviously lag, but importantly, as the rest of the economy begins to heal, the pain for local government will continue for some time. In fact if, as I suspect, the economy will be in the tank for some time, local gov entities will be in a perilous condition.

  13. KFritz

    This effect will be worst in areas dependent on tourism and business travel. While restaurants and bars are suffering, grocery markets and purveryors of health care products are flourishing like never before, so areas not dependent on tourism will not do quite as badly. Wait staff will screwed everywhere.

  14. Scott1

    Occupy and the importance of a debt Jubilee to capitalism or stability of the realm come to mind. What causes write downs or write offices? The lingering effects of the bailouts of 2008 have been the further consolidations of deed ownerships and I assume higher mortgage payments driving the higher rents, though there is greed and corruption involved.
    States in general do not have fiat Treasury power, though they could create banking systems to gain that power. They could issue their own Treasury Notes to pay State Government employees such as teachers & that way supplement shortfalls of dollars in their systems, I suppose.
    The current attitude of the Federal executive does seem to be “I don’t want to do it, you do it.” There does appear to be a downside far as strength of the Union.

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