Bad Times, Good Times for State & Local Budgets

There are some interesting reads on the state & local budget front today. First, reports on a new Rockefeller Institute report finding that state/local sales tax collections are seeing their worst decline in the last half-century:

Forty-one states saw declining revenues in the fourth quarter of 2008, with the Far West region suffering the most, the Nelson A. Rockefeller Institute of Government said in its latest report. And the bad news for states doesn’t end there: personal income tax collections for the same period fell 1.1 percent and corporate income tax revenue dropped by 15.5 percent. All state tax collections for the fourth quarter of 2008 showed a decline of 4 percent, the first decline in more than six years.

The fiscal outlook for this year appears worse. For the opening months of 2009, early figures show an overall revenue decline of more than 12 percent, “a further dramatic worsening of fiscal conditions nationwide,” the institute said. Donald J. Boyd, senior fellow at the Rockefeller Institute and study co-author, predicts that the budgets state lawmakers are crafting now “will have to be buttressed with additional spending cuts or tax increases as the year progresses.”

That certainly appears to be the case in California. As the San Francisco Chronicle reports today, the state may have just closed a $42 billion budget shortfall, but they’re likely to be heading back for another round of budget balancing in the near future:

The [California Department of Finance] reported Monday that the state’s revenue was $415 million below what was forecast in the budget deal in mid-February. For the year, the budget is off by $737 million, according to the finance department. Those estimates come on the heels of a report Friday from State Controller John Chiang that found revenue down $178 million for the month.

[…] [T]here almost certainly will be more cuts in state spending. Under current worst-case scenarios, including the failure of three budget-related measures on the May 19 special election ballot, lawmakers may be looking at a $14 billion budget shortfall.

But as this USA Today column indicates, the “government as a jobs program” mentality is still alive and well in state and local government:

Even as they warn of budget cuts across the nation, state and local governments have proven resourceful in avoiding severe spending reductions and mass layoffs that have plagued the private sector. Headline-grabbing budget shortfalls have translated, so far, into mostly small reductions or none at all.

Phoenix laid off only 10 full-time employees from the city’s 15,000-person workforce. The 1,000 jobs lost were eliminated through attrition, vacancies and transfers. The city’s unionized workforce got its scheduled pay raises, and spending will be about the same this year as last, although less than originally planned.

“Think of state and local government as an automatic economic stabilizer,” Georgia State University economist Barry Hirsch says. “It functions the same way as unemployment insurance kicks in during a recession.”

By most economic measures, states, cities, school districts and other local governments have weathered the economic storm with remarkable resilience, government data show. Spending is up. Hiring is up. Compensation is up. Revenue is flat.

Let’s never forget that someone’s going to get stuck with the bill. The bigger the public sector gets, the fewer people there are left in the private sector to pay for it.