State and Local Government Budget Blues

State and Local Government Budget Blues

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On Saturday, President Obama asked Congress to extend federal aid to the states. Because their fiscal years run from July 1 to June 30 (the federal fiscal year runs from October 1 to September 30), the imminent expiration of temporary federal aid could lead to a sharp cutback in state spending that would hamper the economic recovery.

A June 3 report from the National Governors Association and the National Association of State Budget Officers shows that the states have cut aggregate spending by $74.4 billion, or 10.8 percent, since 2008. The expiration of $55 billion in temporary federal aid to the states could lead to further substantial spending cuts beginning on July 1.

Budget expert Stan Collender warned on June 8 that a sharp cutback in state spending mandated by state balanced budget requirements could have a negative effect on the economy as a whole.

A June study by the Center for Economic and Policy Research examines the high cost of prison incarceration in the U.S., which has the highest incarceration rate of any country on earth—we have 753 people in prison per 100,000 population; the next highest country, Poland, has an incarceration rate of just 224. The study recommends that the incarceration rate of non-violent offenders, who represent 60 percent of the prison population, be reduced by half, which would lower correctional costs for state and local governments by $7.6 billion per year. The federal government could save an additional $7.2 billion annually.

A May 26 report from Pew reviewed the responses of 13 cities to the recession. Virtually all were enacting broad based tax increases as well as new fees, job cuts and reductions in pay and benefits for municipal workers.

On May 15, Northwestern University economist Joshua Rauh published new estimates of the unfunded liabilities of state pension plans. He expects many state pension systems to run out of money in 10 to 20 years.

A May paper from the Institute for the Study of Labor looks at the distributional consequences of cutting the pay of public sector workers based on the recent experience of Ireland.

A May report from the National League of Cities shows that 22 percent of cities have been forced to reduce budgets and personnel for public safety.

Joshua Coval of the Harvard Business School found that increased government spending in a state is associated with lower corporate spending and employment in an April paper. There is a May 24 interview with Coval here.

A March 5 OECD study examined the cyclical behavior of subnational governments throughout the OECD. It found that such governments in the U.S. behaved in a far more cyclical manner—exacerbating the business cycle rather than moderating it—than in any other major country.

A February study by economists Joshua Aizenman and Gurnain Kaur Pasricha found that fiscal contraction in the states offset almost 100% of the fiscal stimulus at the federal level in 2009.

Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006)

Bruce Bartlett’s columns focus on the intersection of politics and economics. The author of seven books, he worked in government for many years and was senior policy analyst in the Reagan White House.