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Economic Research

State and Local Budgets Hinge on Economic Recovery

As spring inched toward summer, sinking revenues and rising demand for services weighed on local and state governments across the Southeast. Residential and commercial property values have stagnated or fallen, unemployment is up, and worried consumers and businesses have reduced spending. Like a kink in a garden hose, those nasty economic realities have pinched the largest revenue streams that feed the Southeast's states and municipalities—taxes on income, real estate, retail sales, and property sales.

Photo montage of state services and a scissors

State and local governments in the Southeast, like those in the rest of the nation, are facing difficult budget choices as the economic recession continues to take a toll on important sources of government revenue. Several states braced for further budget cuts at public universities. Counties and cities across the Southeast closed libraries. Georgia whittled dollars from a scholarship program for high school valedictorians, and state departments left vacant jobs open. Southeastern cities laid off and furloughed employees, even police officers. Atlanta's $4 billion water and sewer system overhaul was imperiled as the city's credit rating hovered just above junk-bond status.

Most U.S. states—including all six Southeastern states—have constitutional or statutory requirements to balance their budget, and most of these states are prohibited from carrying over a deficit into the next fiscal year, according to the National Conference of State Legislatures. Faced with these restrictions, every Southeastern state and many cities and counties have been forced to either increase taxes and fees—a dicey political proposition when many citizens' finances are hurting—reduce costs and services, or draw on reserves. Most have drawn down rainy day accounts and cut programs while, to a lesser degree, increasing fees and taxes on items such as cigarettes.

As bleak as the fiscal picture looks for the region's state and local governments, some short-term relief could be on the way—the American Recovery and Reinvestment Act of 2009, the federal economic stimulus program. Florida, for instance, plans to use about $3 billion of Recovery Act funds to help make up some of its $5 billion-plus budget shortfall for the July 2009–June 2010 fiscal year, according to the state.

Related Links
On this site:
Regional Economic Information Network
On the Web:
Center on Budget and Policy Priorities
Stimulus investments by state
National Association of State Budget Officers

After stimulus grants are spent, however, the fiscal health of Southeastern states will depend heavily on the strength of an economic recovery, said Navnita Sarma, a Federal Reserve Bank of Atlanta economic research analyst who tracks state government finances. A powerful, rapid rebound would quickly generate higher sales and income taxes, and presumably, though more gradually, strengthen property values and thus property tax revenues that are vital to local governments. In a tepid recovery, tax collections would rise more slowly.

"The states are all tightening," Sarma said. "They're looking at every component of their budgets. How their economies recover will have a huge effect on their fiscal outlook."

Government work feeling the pinch
Federal, state, and local governments are a significant part of the Southeastern economy. At the end of March, the region's 3.28 million public sector jobs accounted for 17 percent of nonagricultural employment, according to figures from the U.S. Bureau of Labor Statistics (BLS).

And so far, at least, jobs in the government sector have been more secure than jobs in the private sector. In the 12 months through April, while overall nonfarm employment in the Southeast declined 4.2 percent, by 843,500 jobs, government employment nudged lower by only 0.04 percent, or 1,400 jobs, according to BLS data.

The recession has hit governments at all levels hard. When property values and consumer spending rose steadily, tax revenues increased along with them. With the decline in home prices and curtailed retail sales, providing services has become a significant challenge for state and local governments.

Public sector employment declined from April 2008 to April 2009 in Alabama, Florida, and Georgia and increased slightly in Louisiana, Mississippi, and Tennessee. Meanwhile, every state lost private sector jobs during the same period.

While federal stimulus funds should salve some of the immediate fiscal pain, determining the longer-term implications of budgetary problems for the Southeast's governments is difficult, Sarma said. Health care and education, being the two biggest expenditures in most states, have already been slashed in most of the region's states, she pointed out. Some question what the cuts in education, especially, might mean for the region's future economic growth.

"There's a lot of concern here about what kind of knowledge-based economy we're going to construct if this is how we react to a crisis," said David Colburn, professor of history and executive director of the Askew Institute on Politics and Society at the University of Florida, referring to that state's plans to significantly reduce higher education spending.

Lance deHaven-Smith, professor of public administration at Florida State University and author of several books on Florida politics, said that Florida counties could be pinched worse than the state or cities. In addition to operating school systems, county governments have state-mandated responsibilities, including sheriffs departments and corrections, that are difficult to downsize, he noted. What's more, Florida counties depend more heavily than cities on property taxes and are more constrained by the state in their ability to increase those tax rates, deHaven-Smith said.

"The counties are going to be very hard pressed to find enough cuts," he said.

The current recession could lead to more consolidation of services between Florida counties and cities, he noted, though complete mergers of governments—like the city of Jacksonville and Duval County in the 1960s—are still unlikely.

Photo of dollar bill cut in two
Funds from the 2009 Recovery Act are already helping some states, cities, and counties, which will receive them through 2011. The six states of the Southeast stand to receive up to about $35 billion cumulatively, according to state government Web sites and the U.S. Government Accountability Office (GAO). The bulk of those funds is designated for health care, education, and work on roads and bridges.

After those one-time grants, many states could still face serious money problems. At least 47 states, including the six Southeastern states, expect deficits for fiscal year 2010 and beyond, according to the Center on Budget and Policy Priorities (CBPP), a Washington, D.C.-based research group. In fact, the CBPP estimates that the combined shortfalls will be bigger in 2011 than in 2010.

Signs of ongoing revenue declines continued to appear as summer neared. In late May, Georgia Gov. Sonny Perdue informed state legislators that, on top of $2 billion in earlier budget cuts, state agencies, excluding education, would lose 25 percent of their June funding. According to news reports, Perdue said he was forced to lower revenue estimates by $274 million for fiscal 2009, which ends in June.

Beyond 2011, the stimulus money used to plug revenue gaps will be gone. States also must be careful about using Recovery Act funds to create benefits that they might subsequently have to retract for lack of funds, Sarma pointed out.

The hill is getting steeper
With his state already facing a $1.3 billion budget shortfall, Louisiana Gov. Bobby Jindal in April told state legislators: "The budget challenges [will] get harder in the coming years."

Mississippi's Revenue Estimating Committee projects that state revenues will be $402.7 million, or 7.9 percent, short of expectations in fiscal year 2010, which begins in July 2009, after a projected general fund shortfall of $301 million in fiscal 2009. Meanwhile, the recession is likely to heighten demand for government services such as unemployment benefits, Medicaid, and food stamps, areas that will be supplemented by stimulus funds. "Some Mississippi officials," reads a GAO report on the stimulus program, "believe that the state's recession could continue through fiscal year 2012."

In Alabama, Assistant Finance Director Bill Newton introduced a January presentation to the state's Joint Legislative Budget Committee by stating: "Past—the good; present—the bad; future—the ugly."

Tax revenues in Louisiana, Mississippi, and Alabama have actually held up better than those in other Southeastern states recently. During the first quarter of the 2009 calendar year, general fund tax revenue fell in all six states versus the same period in 2008: by 19.3 percent in Georgia, 15.3 percent in Florida, 10 percent in Tennessee, 6.3 percent in Louisiana, 1.7 percent in Alabama, and 1.4 percent in Mississippi. Georgia and Florida tax collections plunged by $770 million and $1.1 billion, respectively.

The six states took in a combined $17.56 billion in general fund taxes in the first quarter, down 12 percent from $19.9 billion in the same period of 2008, and down 16 percent from the first three months of 2007.

Photo of statehouse and calculator

In the meantime, outlays had been climbing in most states, though that trend seems to be receding. Nationwide, state general fund spending increased by 5.3 percent in fiscal 2008, lower than the 6.3 percent average of the past 31 years, according to the December 2008 Fiscal Survey of States by the National Association of State Budget Officers and the National Governors Association. The same study showed that state spending will likely decline by 0.1 percent in fiscal 2009, which began in July 2008 in most states.

Every state legislature in the Southeast faced both a budget shortfall in the middle of its 2009 fiscal year, as revenues lagged expectations, and a projected deficit in fiscal 2010, says the CBPP. According to a CBPP May 13 report, which may not include recent state legislative budget decisions, forecast budget gaps in fiscal 2010 in Southeastern states ranged from $480 million in Mississippi to more than $5.8 billion in Florida.

Florida Gov. Charlie Crist in late May signed a $66.5 billion spending plan, down $5 billion from two years earlier. In addition to substantial cuts in education and other programs, the budget includes $2 billion in tax and fee increases from sources such as higher fines for traffic offenses and a $1-a-pack increase in cigarette taxes.

Crist called the budget disappointing, according to news reports. But he could have been speaking for public officials throughout the region when he added: "I understand the reality of where we are." It appears where we are going might be just as difficult.

This article was written by Charles Davidson, a staff writer for EconSouth.

"Most of Them Are Just Trying to Stay Afloat "

The economic downturn has affected governments at all levels. States, counties, and municipalities have seen their finances squeezed as sales taxes have fallen as a result of reduced consumer spending and property tax collections have plummeted from house price declines.

EconSouth spoke with Perry Roquemore, who has been executive director of the Alabama League of Municipalities for 23 years, about how its 443 member municipalities are faring.

Photo of Perry Roquemore "Nobody wants to raise taxes now, period. Most cities could do it, but not many of them would want to."
—Perry Roquemore

EconSouth: At the league's recent convention, what did you hear from city officials about their budget struggles?
Perry Roquemore:
They're all tightening to some degree. Cities are not as bad off as counties in our state because cities at least have the right to increase taxes and do things on their own without having to go to the legislature. But yes, they're experiencing cutbacks. Sales taxes are what our cities depend on for most for their revenues, and they are dropping. A lot of cities are talking about their building permits—those are way down.

ES: What are they doing to be more efficient? Using more technology and cutting back here and there?
Roquemore: That, and putting off some of the projects they have planned. A few are looking at furloughing employees for a day every two or three weeks. The others are just watching their pennies, being careful what they're spending their money on right now.

ES: You're not as close to them, but what are counties in Alabama doing?
Roquemore:
Counties in our state don't have any way to change their tax structure or to add revenues from that basis, so it really gets tougher there. Of course, nobody wants to raise taxes now, period. Most cities could do it, but not many of them would want to. Counties don't have as many of those powers so it's a lot harder for them to raise money. So they're going have to cut services if they get in a crunch.

ES: Are you seeing cities affected differently?
Roquemore:
Oh, yes. They're not all the same. Very poor regions—and they were poor regions before all this started—don't have a tax base from which to raise revenue. And the cities on the interstate and those that have a lot of commerce going through them are not doing as well [as before], but they are not doing as badly as those poorer regions.

ES: What do your members say their biggest infrastructure needs are?
Roquemore:
I think most of them are just trying to stay afloat, to be honest with you. A lot of them would like to do more on the infrastructure level because it's been neglected over the years. Hopefully, they'll get some money to do some of that.

ES: What about the years ahead for city budgets? Does it mostly depend on the economy?
Roquemore:
I think most people are optimistic it'll turn. Obviously, everything we do in this country is based on the economy. It won't be as good as it was, but hopefully it'll get better.

ES: It sounds like the overall economy in Alabama is maybe a little better than in some other places.
Roquemore: I have heard that. I think some of the stimulus money came [into] areas like education and Medicaid and helped [the state budget]. Otherwise there could've been some tremendous layoffs of teachers and things like that.

ES: Do your members have concerns that tend to be specific to Alabama cities?
Roquemore:
One of the things on the national level that concerns them a lot is what collective bargaining will cost. There's federal legislation that's very close to passage that would require collective bargaining, and of course that is not something that they do in Alabama. So they're worried about tremendous cost and increases in prices. And on some of the stimulus stuff, you do [a program] for several years, and then the contract calls for a government to pick up all the cost. Well, where's the money going to come from then?

For more information about the Alabama League of Municipalities, see the organization's Web site, www.alalm.org.