Fiscal Realities for the State and Local Governments
What You Don't Know Will Hurt You; What You Can Learn Will Help You
Roger Brinner is a partner and chief economist of The Parthenon Group, a strategic advisory firm serving leading corporations and government sector clients. He has been an economics professor at Harvard University and a visiting professor of economics at the Massachusetts Institute of Technology. From 1983 to 1997, he was chief economist of DRI/McGraw- Hill, one of the two leading economics firms now merged to become DRI-WEFA, a unit of Global Insight, Inc. He holds a BA from Kalamazoo College, an MA in economics from Harvard University, and PhD in economics from Harvard University.
Joyce Brinner is a senior principal with DRI-WEFA, focusing on market forecasting for businesses and government clients worldwide. She has coauthored the respected DRI Models of the U.S. economy and comprehensive energy markets. She received her BA in mathematics from Ohio University, an MA in economics from Ohio State University, and a PhD in economics from Boston College.
Matt Eckhouse is a graduate of Harvard University, with a BA in economics, and is a principal at The Parthenon Group’s Boston office, where he has worked since 2004.
Megan Leahey is a graduate of Harvard University with a degree in applied mathematics. She is an associate at The Parthenon Group in their San Francisco office.
The U.S. economic slump of 2008, as usual for all economic slumps, has taken a dramatic toll on state and local government revenues and budget surpluses. As predictable as this is when properly modeled, states in particular have been even less well prepared than normal. Therefore, it appears that government budget officers, policymakers and their economic advisors, and private-sector economists need help in understanding the external and internal drivers of budget outcomes. A primary goal of this study is to quantify the highly regular, cyclical revenue patterns that emerge when actual revenues are purified of legislated changes. This should assist policy formulation today—as states consider higher tax rates or borrowing—by promoting an understanding of what is temporary and what is permanent in the current revenue weakness. Moreover, if these lessons are learned, future revenue forecasting and budget planning at the state and local levels should be materially enhanced. A second goal is to examine the true sources of the exceptional expenditure growth that precluded the normal buildup of a solid surplus during the economic boom of 2003-2007. The principal culprit is shown to be state and local government pay inflation that has far exceeded private sector norms for the past three years rather than an exceptional medical care burden, as some might think.
JEL Code: H72