NABE Panel: State & Local Government Fiscal Challenges

State and local government tax revenues have fallen significantly during this economic recession, aggravating longerterm structural issues. According to the National Governors Association, 40 states made mid-year cuts totaling $22 billion to their FY 2010 budgets, which followed $31 billion in mid-year cuts in FY 2009. At the same time, 29 states adopted tax and fee increases in FY 2010 amounting to $24 billion. Given the state and local budget shortfalls and weak employment growth, the fiscal situation is not expected to improve materially in FY 2011 or FY 2012. More budget cuts and tax increases are expected, especially in light of the fact that federal government stimulus money— which helped to alleviate even more drastic cuts in FY 2010—will be exhausted at the end of FY 2011.

With this in mind, survey participants were asked about federal assistance to the states. The federal government— which is not restricted by balanced budget requirements imposed at the state level—has more fiscal flexibility. As such, it has been argued that federal help to the states is essential, particularly by many economists in the Obama administration. Indeed, three in five respondents agree that the federal assistance funds allocated to states through the American Reinvestment and Recovery Act (ARRA) were appropriate given the larger economic challenges at the time; however, three in five also suggest that the federal government not continue to “bail out” the states, even after the ARRA funds run out.

Many of the challenges that states are facing are structural in nature. Economists who responded to this survey were asked to rank various remedies that might help correct these fiscal imbalances (Table 2). At the top of the list was the need to address benefits of public sector employees and state-level pension plans for public employees; nearly half of the survey respondents indicate that benefits needed to be cut for both current and future employees. Fifteen percent feel that benefit cuts should be limited to future employees, and 29 percent think that the pension solution should stem from the combination of increased tax revenues and reduced benefits.

Overall, respondents also believe that reducing the number of unfunded mandates from the federal government could work to correct fiscal imbalances in the future. In addition, NABE panelists indicate that state lawmakers should implement new programmatic cuts to state budgets and look to increase the size of their “rainy day” funds. Remedies expected to be less effective are attempting to increase revenue through tax changes and the consideration of constitutional changes or amendments that might enhance states’ flexibility in dealing with their fiscal challenges.

Despite the desire for more austerity, a large part of the solution to states’ current fiscal mess stems from the weak economy. NABE economists surveyed were asked to rank a list of options to boost growth (Table 3). The top-ranked remedy was to streamline and consolidate the regulatory process for businesses, followed closely by lowering the tax burdens on corporations. Over half of the respondents also listed either the granting of tax credits for hiring new employees or reforming unemployment compensation programs in their top three.

Table 2: State Budget Remedies to Correct Fiscal Imbalances

Table 3: Options for States to Promote Economic Growth

Summary | Monetary Policy | Fiscal Policy | State & Local | International |
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