Category Archives: State & Local Finance

State and Local Government Finance: The New Fiscal Ice Age

Source: D. Roderick Kiewiet and Mathew D. McCubbins, Annual Review of Political Science, Vol. 17, May 2014
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From the abstract:
The Great Recession that began in late 2007 had devastating consequences for the fiscal health of state and local governments, and many remain in a precarious financial position. Several cities have declared bankruptcy, and more will do so in coming years. The future, however, promises no long-term relief. Due primarily to the aging population of the United States, state and local governments are allocating large and increasing shares of their budgets to expenditures on Medicaid and on retirement benefits that they have promised to their past and current employees. As these expenditures consume more of their budgets, there is less to spend on transportation, parks and recreation, education, public safety, and all the other services that these governments provide. We are thus experiencing the onset of a New Fiscal Ice Age, a period in which a given level of tax revenue purchases a considerably lower level of current services.
Research Findings

Curtailing the Subsidy War Within the United States

Source: Edward Alden and Rebecca Strauss, Council on Foreign Relations, Policy Innovation Memorandum no. 45, May 2014

From the summary:
Each year, U.S. state and local governments spend tens of billions of dollars to lure or retain business investment. The subsidies waste scarce taxpayer dollars that could better be used to strengthen public services such as education and infrastructure, or to lower overall tax burdens to create a more favorable investment climate. No state wants to dole out such subsidies, but most fear losing jobs to competing states if they refuse. States should take steps to curb subsidies, beginning with greater disclosure and cost-benefit analyses, and building up to a multistate agreement that creates strong disincentives for continuing subsidies. Existing international arrangements provide models and tools for achieving this….

….Rarely do the benefits of these subsidies exceed the costs. In highly mobile industries, like film production, the subsidies do lure business from other states, but any job creation is short-term and film crews are usually imported. In many other industries, subsidies have less influence on location decisions; manufacturers, in particular, require local networks of suppliers and employees with specialized training. Local governments usually lack the sophistication to negotiate successfully with big companies, so they end up subsidizing businesses that would have invested in the state regardless. Public money is wasted that could have gone to lower the overall corporate tax rate or to more productive investments like education and infrastructure—assets that matter more for most business location decisions than one-off tax breaks…..

COLA Cuts in State/Local Pensions

Source: Alicia H. Munnell, Jean-Pierre Aubry and Mark Cafarelli, Center for Retirement Research at Boston College, SLP#38, May 2014

The brief’s key findings are:
– Since the financial crisis, 17 states have reduced, suspended, or eliminated cost-of-living-adjustments (COLAs) for public employee pensions.
– This response was surprising as current employees and retirees tend to be legally shielded from benefit cuts.
– But the COLA cuts have largely been upheld in the courts under the rationale that – unlike core benefits – they are not part of a contractual right.
– In short, defined benefit promises in the public sector are not as secure as many thought.

U.S. Infrastructure Investment: A Chance To Reap More Than We Sow

Source: Beth Ann Bovino, Standard & Poor’s, Ratings Direct, May 5, 2014

In the debate about infrastructure investment in the U.S., the focus is invariably on cost–which is no surprise, given that there are dollar figures in the trillions at stake. Less discussed–but no less important, in Standard & Poor’s view–are the returns that infrastructure investment affords. And not just for lenders, who enjoy lower default rates and higher yields than they might get from investments in similarly rated corporate debt. We’re talking about the multiplier effect that such investments have on an economy: Specifically, how each dollar of infrastructure spending, if allocated wisely, translates into much more than that in terms of economic growth. Most think government spending on infrastructure gives short-term benefits to jobs and aggregate demand. However, investment in infrastructure yields long-term benefits as well, which is often overlooked when determining a project’s benefits (R.O.I.). In addition to the short-term benefit of job creation, significant investments in large projects can enhance efficiency and allow goods and services to be transported more quickly and at lower costs–a longer-term reward.

• A $1.3 billion investment in real terms in 2015 would likely add 29,000 jobs to the construction sector and will add even more jobs to other infrastructure-related industries.
• That investment would also likely add $2.0 billion to real economic growth and reduce the federal deficit by $200 million (constant dollars) for that year.
• After an initial increase in aggregate demand, the economy’s productive capacity and output typically increase once the infrastructure is built and absorbed into the economy. That means increased growth and more job gains long after the project ended.

We found that a $1.3 billion investment (constant dollars) added 29,000 jobs to the construction sector, and even more to the economy when we count jobs added to infrastructure-related industries. This is in line with the Federal Highway Administration (FHWA), which found that a $1.25 billion investment supports 34,779 jobs related to the project. In our analysis, the associated multiplier effect resulted in an additional $2 billion to real GDP in 2015. However, the economy’s productive capacity and output also likely increase once the infrastructure is built and absorbed into the economy. So the investment will likely add more jobs to the economy long after the project ended, supported by studies from the Economic Development Research Group (EDRG) and the San Francisco Fed, which found long-term gains and job growth from investment in infrastructure. … In the U.S., the most telling example is the U.S. Interstate Highway System, championed by President Dwight Eisenhower, who signed the Federal Aid Highway Act of 1956. While the direct economic benefits of the system are difficult to quantify, it’s a safe bet that the world’s second-longest highway system, with an inflation-adjusted price tag of $400 billion to $500 billion, has added more to U.S. GDP in the past half-century than has been spent on it. Given that an estimated one-quarter of all vehicle miles driven in the U.S. are on the interstate system, the efficiencies it provides are self-evident. …

Pension Calculator

Source: Manhattan Institute, 2014

A defined benefit pension guarantees workers a fixed payment throughout their years of retirement. Though increasingly rare in the private sector, it remains the standard form of retirement benefit provided by state and local governments. Pensions are now one of the most hotly-debated topics in public finance, due to their rising costs and generosity relative to what most taxpayers receive.

The pension calculator tool below is intended to inform the pension debate, by allowing users to easily compare benefit levels across all 50 states. Simply click on a state highlighted in blue in the map below to estimate the pension that you would collect after a career in government. The calculator will also provide an estimate of the total annuity cost, or how much you would need to save to replicate that guaranteed income stream in retirement. To compare generosity of benefits between states, click on the “Compare States” tab.

Rich States, Poor States, 2014 Edition

Source: Arthur B. Laffer, Stephen Moore and Jonathan Williams, American Legislative Exchange Council (ALEC), 2014

From the summary:
Throughout the country, states are looking for ways to energize their economies and become more competitive. Each state confronts this task with a set of policy decisions unique to their own situation, but not all state policies lead to economic prosperity. Using years of economic data and empirical evidence from each state, the authors identify which policies can lead a state to economic prosperity. Rich States, Poor States not only identifies these policies but also makes sound research-based conclusions about which states are poised to achieve greater economic prosperity and those that are stuck on the path to a lackluster economy….

States Are Still Funding Higher Education Below Pre-Recession Levels

Source: Michael Mitchell, Vincent Palacios, and Michael Leachman, Center on Budget and Policy Priorities, May 1, 2014

From the summary:
Most states have begun in the past year to restore some of the cuts they made to higher education funding after the recession hit. Eight states, though, are still cutting, and in almost all states — including those that are have boosted their support — higher education funding remains well below pre-recession levels. The large funding cuts have led to both steep tuition increases and spending cuts that may diminish the quality of education available to students at a time when a highly educated workforce is more crucial than ever to the nation’s economic future.