Reality Bites: States and Local Government Faces Cut Backs

Municipalities and States are feeling the pinch across the country.  Revenue declining due to a shrinking tax base and high unemployment cities is forcing local and state to cut services. In Seattle the city foregoing cleaning wastebasket in outdoor toilets because of lack of funding.

All the while Washington is spending money like there’s no tomorrow. From the Financial Times:

But there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.

Last year the federal governments use a stimulus but for budgets 2011 and 2012 is another story:

Last year, that pain was partly eased by Barack Obama’s stimulus package(s). But that spending splurge is now fading away. And in fiscal 2011 and 2012, the states are expected to face another combined budget deficit of $260bn, with the 2011 shortfall in places such as New Jersey, Illinois, Nevada and Arizona projected to be more than 35 per cent of last year’s budget.

So far, the municipal bond market has been dangerously complacent about all this, with yields on 10-year municipal bonds hovering just above 3 per cent. But even if markets seem relatively relaxed, the key point is that the state statistics are already having a very real world impact – in contrast to the federal debt.

Seattle isn’t the only government making cuts:

Never mind the trivial matter of Seattle’s comfort stations; as it happens, Washington State’s finances are better than most. In New Jersey schools, classes are being cut. In California, public sector employees are not getting paid. In New York, a subway extension has just been cancelled. And in places such as Illinois and San Diego, pension benefits are being renegotiated altogether, breaking numerous taboos.

This, in turn, begs a bigger question: what will be the wider economic and psychologal impact? One obvious, immediate consequence of these cuts is that they appear to be undermining consumer confidence, over and above the damage already being inflicted by the stubbornly high unemployment rate. The pattern may also be fuelling some subtle shifts in terms of how investors view the future.

Financial Times has the rest of the story.

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