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Privatization & Government Reform Newsletter

New Reports Highlight Fiscal Shape of States, Cities

Hard-hit by Great Recession, states and local governments face ongoing fiscal pressures

Leonard Gilroy
December 3, 2013

Earlier this year, three separate reports by major national organizations suggested that states and local governments are going to face continued fiscal headwinds into the future. Two new reports by the National Association of State Budget Officers (NASBO) and the Pew Charitable Trusts, respectively, shed additional light on the fiscal shape of state and local governments in the wake of the Great Recession and similarly suggest persistent fiscal pressures.

In November, NASBO released its latest State Expenditure Report, which for the first time in its 26-year history reported a decline in total state spending in FY2012. While general fund and other state fund spending that year actually rose by 2.2 percent, federal transfers to states dropped 9.1 percent (largely due to the expiration of stimulus funds), yielding an overall 1.7 percent reduction in total state spending in FY2012. FY2013 is estimated to improve, with an expected 4.7 percent increase in total state expenditures due to an increase in both state and federal funds. Other findings from the NASBO report include:

Looking forward, the NASBO report suggests that fiscal uncertainty is likely to persist in the short- and long-term, given the “slow pace of economic growth, uncertainty surrounding federal fund levels, questions regarding the future performance of state revenue, and increased spending demands.”

On the local front, The Pew Charitable Trusts released a report two weeks ago examining how the 30 largest U.S. cities have fared since the onset of the Great Recession, finding that they have faced major fiscal challenges, have been slow to recover, and felt the downturn’s effects later than the federal and state governments. The Pew report finds that:

Moving forward, the Pew report finds that cities can expect ongoing fiscal pressures in the form of reduced intergovernmental aid from federal and state governments, continued sluggishness in property tax revenue receipts, and massive, unfunded government employee pension and retiree healthcare obligations.

To the latter point, the report cited an aggregate $225 billion in funded liabilities—$121 billion in pensions and $104 billion in retiree health care and other nonpension benefits—across all 30 cities. The report concludes that, “in 2010, nearly half of the cities examined were not paying their full, recommended annual contributions to the funds meant to pay for these benefits [..] Deferring these obligations also means that future dollars available for the day-to-day operating functions and services on which citizens rely will be squeezed, as cities are forced to make up the difference for pensions and other post-retirement benefits.”

The full Pew report is available here, and individual city profiles are available here.

Overall, the NASBO and Pew reports add to a body of recent research that suggest that states and local governments face ongoing fiscal uncertainties and continued budget pressures that will hopefully drive policymakers towards greater fiscal restraint and the pursuit of new ways to control costs and increase government efficiency.

Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here.

Leonard Gilroy is Director of Government Reform

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