Local Government Pain and Rolling Political Failure in the US

As commentators noted from the outset, the financial and automotive sector bailouts of 2008-09 effectively transferred enormous quantities of private sector debt onto the public sector. This emplaced a looming threat of runaway federal budget deficits, escalating borrowing costs for the federal government, currency devaluation, and inflation. As chronologically distant as these dangers may be, they are legitimate cause for concern, and have hindered the efforts of progressive elements in Congress and the Obama administration to revivify the economy with spending programs. While the duel between conservatives preaching budget “austerity” and progressives promoting government reinforcement of the flagging economy has dominated national attention, the feared government budget crisis has in fact surfaced--off stage, in state, county, and municipal governments nationwide. Local budget crises are intensifying in unprecedented ways, and the economic knock-on effects are catching the country by surprise. For the moment, the political consequences remain malleable, which gives the Obama administration and the Democratic Party one more opportunity to lead. Will they take it? A Dark Prospect—900,000 Jobs Local government in the US is not an insignificant backwater. States, counties, and cities now employ 14.4 million people (about 7.3 percent of the working population), and they collect about $2 trillion (about 13 percent of GDP) in taxes and duties of various kinds. (1) The recession has been choking local tax collections for three years now. Despite imposing about $30 billion in a variety of new taxes and fees in FY2010 alone, tax receipts at the state level in FY2010 declined 12 percent below that of FY2008. And so states’ expenditures fell from $687 billion in FY2008 to $613 billion in FY2010. (2) Need for services is, however, swelling rapidly, what with populations growing, safety nets supporting ever more people, and obligations to pension plans rising every year. Obama’s February 2009 stimulus package kept the local budget crisis somewhat at bay for about a year, by allocating $135 billion in flexible emergency funding to states. This year’s emergency local government stimulus was only one-tenth the size, however, which leaves the localities in dire straits. (3) At the state level alone, administrations need to close budget gaps totaling $140 billion in FY2011 and an anticipated $120 billion in FY2012. (4) This is a dark prospect. Local governments have by now depleted their emergency reserves; they have raised taxes about as far as they dare; and they have reduced the least essential services (at least 30 states have raised taxes during the first two fiscal years of the recession, and at least 45 have reduced services). (5) The start of the new fiscal year on July 1st brought a wave of merciless service cuts seemingly everywhere in the country. Thus, the city of Atlanta, where about 250,000 workers are wholly dependent on public transportation, is abolishing 30 percent of its bus lines and 14 percent of its commuter train service, is raising rates on remaining service, and is laying off 300 workers. (6) A plethora of cities are turning off streetlights; police departments are auctioning off helicopters; firefighting stations are closing on some days of the week; some schools are going to a four-day week; some counties are returning to gravel roads because they can’t afford to maintain pavement. The list is endless. (7 Widespread privatization of parks, bridges, prisons, universities, and other public assets is likely to come next. (8) Local governments at all levels are expected to shed 247,000 workers just in the next few months, and the cascade will continue from there. (9) Analysts at the Economic Policy Institute estimate three private sector job losses accompany the loss of every ten government jobs. (10) Absent further federal assistance, contraction of local administrative activity stands to shave a full percentage point off US GDP, according to a sober estimate, with the cumulative cost to labor over one year reaching 900,000 jobs. (11) Even after the recession abates, the longer-term future promises little relief for local government budgets. Swelling pension liabilities are a particular problem in many states, and could scare bond buyers away. (12) No state has defaulted on its bonds since the 1930s, and the federal government would surely support any state that risked default now. No one knows, however, how Washington would cope if a swathe of states headed towards default simultaneously. History shows that governments can default on very small amounts of debt, and also shows that the plunge into default can catch them by surprise. (13) Another Front in the One-Sided Class War Predictably, the Right is pouncing on local budget crises as evidence of bloated government. They are fulminating about runaway spending at the local level, and rejecting federal support in favor of local budget cuts and layoffs. The rhetoric features wild exaggerations, such as accusations that government employees get 45 or 60 percent more pay than do private sector employees (the difference is well below 20 percent (14)). More sinister is the Right’s vitriol over supposedly lavish pension and health care benefits for public sector retirees, which they insist are bankrupting the country. (15) The goal of this agitation is not merely to shrink government, so as to extend the conquest of the market system at the expense of planning and social safety nets. It also aims to drive down labor unionization and to divide the labor movement against itself. The public sector is one of the last refuges of unionized labor in the US, with almost 37 percent unionization, versus less than 8 percent in the private sector. (16) Public sector workforce reductions play straight into the hands of the ownership class. Further, insofar as working Americans can be persuaded of the illegitimacy of public sector pay and benefits packages, the labor movement will be split and neutralized. Regrettably, some current and former trade union leaders are now siding with conservative agitators and calling for reducing outlays to government workforces. (17) Even where local governments are providing more to their employees than does the private sector, to blame them for this is deeply insidious. It is to ignore the evisceration of wages, benefits, and retirement prospects that the monied elites have imposed on the private sector over the last thirty years in order to line their own pockets. Is it not remarkable that wages for the bottom 90 percent of the population have more or less stagnated in real terms across nearly a half century of economic growth? (18) The fruits of economic productivity have flowed exclusively upward. (19) The burden of health care costs on lower and middle class Americans has increased far beyond the value of newly available drugs and technologies, and retirement prospects are distinctly dismal for the great mass of the ageing population. (20) Over 40 percent of those still working are now engaged in low-paying service jobs. (21) Local government employees deserve respectable wages, health care benefits, and retirement prospects, not savage reductions. Yet Another Failure of Political Leadership The Republican Party’s attitude to the needs of local administration is well established. In early 2009 they successfully pressured the Obama administration to deduct $100 billion from the stimulus plan’s support for state budgets, and they will pursue the same line going forward. (22) Given the stakes, and given that progressives have proposed a raft of corrective measures, why is Obama doing so little to address the local government crisis or to shape public opinion towards support of aggressive reforms to solve it? Well, to turn the question around, what makes you think this administration prioritizes the solution of problems over catering to powerful corporate and military interests? The Republicans and the White House are effectively united in opposition to any reforms that would redirect resources away from such interests. So local governments will be hung out to dry, with consequences we cannot fully predict. ________________________________ (1) The workforce number comes from Simone Baribeau, “State, Local Government Payrolls Shrink to 2007 Levels”, Bloomberg.com, August 06, 2010. Tax collection data is from U.S. Census Bureau, State and Local Government Finance (http://www.census.gov/govs/estimate/). Local administrations’ budget expenditures are considerably higher than their revenues, on account of allocations from the federal government and debt issuance. Expenditures topped $3 trillion in FY2010. FY stands for fiscal year—from July 1 to the end of June in 46 of the 50 states. The four states whose fiscal years begin on a date other than July 1 are New York (April 1), Texas (September 1), and Alabama and Michigan (both October 1). (2) National Governors’ Association, The Fiscal Survey of States, 2010, p. 14. http://www.nasbo.org/LinkClick.aspx?fileticket=gxz234BlUbo%3D&tabid=38 (3) Congress did approve a $26 billion state-aid package on August 10th, but only after cutting the original proposal in half, and securing about half of the $26 billion through reductions in future funding for food stamp programs (see, e.g., Joshua Green, “The Raid on Food Stamps”, Boston Globe, August 12th, 2010. Since some money remains from the 2009 stimulus plan, federal assistant to states will be about $40 billion this fiscal year (Elizabeth McNichol, Phil Oliff, and Nicholas Johnson, “Recession Continues to Batter State Budgets”, Center on Budget and Policy Priorities, July 15th, 2010).. (4) McNichol et al., op. cit. (5) McNichol et al., op. cit. (6) “End of the Lines”, The Economist, August 21st-27th, 2010, p.24. (7) The Rachel Maddow Show blog, August 9th, 2010 (http://www.msnbc.msn.com/id/38625585/ns/msnbc_tv-rachel_maddow_show/). A thorough overview of state-level service cuts is Nicholas Johnson, Phil Oliff and Erica Williams, “An Update on State Budget Cuts”, Center on Budget and Policy Priorities, August 4th, 2010. (8) Henry Blodget. “Broke States Should Save Themselves By Selling Off Roads, Schools, Parks, And Other Assets, Says Altucher”, August 20th, 2010 (http://www.businessinsider.com/broke-states-should-save-themselves-by-selling-off-roads-schools-parks-and-other-assets-says-altucher-2010-8). (9) The Rachel Maddow Show blog, August 6th, 2010. (10) “The Lex Column”, Financial Times, August 3rd, 2010, p.12. (11) McNichol et al., op. cit. (12) The current poster child in this respect is New Jersey. See, e.g. Richard Perez-Pena, “Deep Crisis for New Jersey’s Pension Funds”, New York Times, August 19th, 2010. According to the Pew Center on the States, states overall are $452 billion behind in their pension contributions while also having $554 billion in liabilities for retiree health care (Steven Greenhouse, “Payback Time; Labor’s New Critics: Old Allies in Elected Office”, New York Times, June 28th, 2010.). (13) For discussion, see Mary Williams Walsh, “States’ Debt Woes Grow too Big to Camouflage”, New York Times, March 29th, 2010. (14) See, e.g. James Sherk, “Government Jobs: Bloated Pay, Benefits Cost us All”, USA Today, July 7th, 2010. Pay for Federal workers is 60 percent above the private sector average, but only 22 percent after accounting for educational qualifications. Local government wages are far more modest. The gap is just 4.5 percent in North Carolina municipal administrations, to take one example (Brian Balfour, “As Private Sector Struggles, local Government Workforce Expands”, Civitas Institute, July 26th, 2010 (http://www.nccivitas.org/media/publication-archive/policy-brief/private-sector-struggles-local-government-workforce-expands). And The Economic Policy Institute calculates that public employees in New Jersey are undercompensated by almost 6 percent (Jeffrey H. Keefe, “Are New Jersey Public Employees Overpaid?”, July 30th, 2010, http://www.epi.org/publications/entry/BP270). (15) The flag bearer is Mortimer Zuckerman, “The Bankrupting of America”, Wall Street Journal, May 21st, 2010, Opinion page. Another is State Budget Solutions’ policy brief, “Public Employee Costs Sap Budgets and Constrain Reform”, February 19th, 2010 (http://www.statebudgetsolutions.org/publications/detail/public-employee-costs-sap-budgets-and-constrain-reform-2). (16) http://en.wikipedia.org/wiki/Labor_unions_in_the_United_States (17) Greenhouse, op. cit. The source records that 22 percent of cities did reduce unions’ pay and benefit packages in 2009, and we can expect much more in the same vein this year. (18) In 2008 dollars, average hourly wages were $17.54 in 1964, and $18.52 in 2008 (Gus Lubin, “15 Mind-Blowing Facts About Wealth and Inequality in the US”, businessinsider.com, July 16th, 2010, slide 6). (19) As of 2007 the bottom half of the population owned 0.5 percent of the stocks and bonds; the top 10 percent owned 90 percent, and the top 1 percent by itself owned 51 percent (ibid, slide 3). (20) One calculation shows 59 percent of Americans aged 56-62 do not have enough savings to retire (Mark Whitehouse, “Another Threat to Economy: Boomers Cutting Back”, Wall Street Journal, August 16th, 2010). (21) Kit R. Roane, “Wal-Mart Sales Suggest the Economy is Still Shaky”, Fortune , May 20, 2010 (http://money.cnn.com/2010/05/20/news/economy/consumer_retail_walmart.fortune/index.htm). (22) The Rachel Maddow Show blog, August 6th, 2010.

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