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date: 22 August 2019

(p. xiii) Preface

(p. xiii) Preface

This handbook came into being not on a “dark and stormy night,” but rather on a crystal clear day in January 2010, following a wintry storm that left a bright deep mantle of fresh snow. Such days encourage taking a new look at things. In the case of state and local government finance, a reappraisal was very much in order, as several decades of relatively sunny fiscal times were rapidly coming to an end in the midst of great economic uncertainty and a faltering, deeply divided political system. The two editors met to outline what this book should contain and to round up as contributors their colleagues who worked in the various disciplines of state and local public finance. The very large and disparate state and local sector had seen its speed-ups and slow-downs in growth—with occasional bad patches for particular cities and states—over the nearly six decades since World War II. But this time it was clear that things were different. This was not just another occasional bad patch.

What states and localities had to offer in the way of more schools, more roads, and improved public services and facilities had evidently been what the voters wanted and were willing to pay for. Yet the economic and political tides were turning to alter that pattern of slow but steady expansion. Fiscal systems of states and localities, a legacy of earlier times, had become increasingly vulnerable to changes in the US economic, demographic, and institutional framework. But the need for spending and revenue decisions more responsive to changing conditions had been deflected or deferred. In the view of many experts, the financial framework of the state and local government sector was becoming “obsolete.” Indeed, the massive financial and economic downturn of 2008–09 (the Great Recession) coupled with a shifting political environment would prove to be “game-changer” as the full impact finally hit state and local governments. So we assigned topics to contributors that matched their expertise, and asked them to update state of the art in their discipline and to prognosticate about how changes they perceived would affect policies and practices in the future.

The Great Recession of 2008–09 devastated, in succession, state as well as local government revenues, which over the years had become increasingly reliant on the low-hanging fruits of growth. This was best exemplified by the boom in real estate values and the tide of income and transactions associated with building, furnishing, and financing new structures. Added to this was the legislative narrowing of tax bases and the increases in rates applied to those contracting bases that had made them increasingly sensitive to changing economic conditions. The Great Recession ushered in five consecutive quarters of decline in state revenues and (p. xiv) drove an unprecedented forty-eight of the nation's fifty state budgets into unexpected deficits in fiscal year 2009. As this erosion in state revenues accumulated, it soon exhausted many states “rainy day” funds and other reserves.

At the outset the states were not left totally bereft of help. In the spring of 2009, the federal government, which had earlier stepped in to assist the financial sector, launched a §787 billion stimulus program that included §180 billion in financial aid for the states, with most of that aid flowing in 2010 and 2011. Amid the numerous initiatives were programs to bolster state spending on Medicaid, education, and capital spending. The stimulus provided a burst of support and helped fill in state budget gaps, dampening the decline in output and employment. Nonetheless, the stimulus program became politically controversial as the increased federal spending in the face of diminished revenues added to the deficit. Thus, the stimulus spending turned out to be only a transitory buffer for the states.

The year 2010 ended with two important events: the elections of November 2010 and the release of two reports on the deficit problems of the federal government, each of which underscored the overarching fiscal and political ties that exist between the state and local sector and the federal government. First, the November elections ended Democratic control of the House of Representatives and increased the number of Republicans in the US Senate. The “wave” election results brought many new Republican governors into office and resulted in Republicans gaining increased control over state legislatures. The newly elected officials reflected the rise of an electorate that was avowed to constrain tax revenues as part of a long-term political strategy to downsize the public sector in American life. Furthermore, some newly elected Governors and legislative majorities became engaged in controversial state budgetary battles, often with unionized state government workers who resisted losing their right to organize and collectively bargain for various retirement and health benefits. But while not every state was subject to pyrotechnics, legislatures on both sides of the aisle and governors of both parties have since had to deal the new normal of prolonged austerity.

Locally, revenues raised have historically been tied to property values and activities associated with real estate transactions. Yet the continuing national depression in housing markets, best illustrated by the sustained decline in housing prices and the high level of mortgage foreclosures, has deeply eroded the revenue base. Meanwhile, the fiscal problems of the states compounded those of the local governments as the amount of state aid provided to them declined. By the end of 2011 the state and local sector had become a pro-cyclical damper on economic recovery having reduced employment by 600,000, which is a 3.2 percent cut since the high water mark of early 2009.

Two reports on the federal fiscal outlook focused the growing discontent with the federal budget deficits and the consequences of rapidly growing federal debt. First, in November 2010, the Debt Reduction Task Force of the Bipartisan Policy Center released its recommendations for Restoring America's Future. That report was followed in December by one authored by the presidentially appointed National Commission on Fiscal Responsibility and Reform. These documents, (p. xv) which varied in particulars but not in the fundamental substance and immediacy of their findings, detailed the steps that would have to be taken to address present and future federal imbalances. Moreover, the various schemes for balancing the budget made clear that addressing the federal deficit and debt issue would likely mean future austerity for state and local government, which would see not only a decline of federal assistance but also increased competition with the federal tax collectors in generating revenues.

The federal budgetary battles, which consumed the US Congress in early 2011, reached a crescendo that summer in the dispute over raising the federal government's debt limit amid threats of closing the government down and, perhaps, defaulting. A temporary solution was devised that avoided those outcomes; but the substance of the problem—restructuring the federal entitlement programs, the costs of which may outweigh what the public's willingness to pay—remained unresolved. Meanwhile, the economy has continued to languish with high unemployment, depressed consumer and investment demand, and a volatile securities market. One casualty of the congressional deadlock was the US government's bond rating, which was lowered by rating firm Standard and Poor's from the highest level (AAA) for the first time ever. Meanwhile, many AAA-rated obligations of states and localities were put on “negative watch” by Moody's. “Political risk” has now become an increasingly important factor in government credit ratings in the United States, a novel and unsettling development.

As this preface is written in late 2011, the future of the nation's public finances remains cloudy at best, and, at worst, dismal. The Great Recession and its aftermath exceeded our expectations in becoming the Great Contraction, where unemployment remains high and with a projected rate of economic growth that is insufficient to soon close the gap between the actual and full employment level of national income and output. Moreover, the fiscal fortunes of state and local governments are tied not only to the domestic economy, but have increasingly become global as well. At present, the fate of the European economy, beset with public finance crises of its own, is hanging in the balance, with the United States very much affected, but seemingly diminished in power to influence the outcome.

The times ahead will be difficult. Choices will have to be made. It is our hope that this collection of chapters will contribute to understanding the options for finding a sustainable balance between the public's demands for services and its willingness to provide resources to deliver them. No one has all the answers, but each author contributes her or his perspective, experience, and analysis to the issues at hand. To the extent that experience and reason have a place in today's noisy and excitable public forum, then these contributions can help in deciding what can be done to restore economic vigor and public confidence. This book is dedicated to that end. (p. xvi)