Finance

Budgets, Bonds and Basketball

When it comes to raising money and spending it, states and localities face formidable political obstacles.
by | July 15, 2010

If states thought there would be public outcry over the failure of Congress to give them some stimulative Medicaid relief this year, a recent June survey by the Pew Research Center and the National Journal should disabuse them of that notion.

"Most Americans," the researchers report, "see the deteriorating budget situations in many states as a problem that the states themselves -- rather than the federal government -- should solve." Only 26 percent of adults in the survey support the federal government giving money to states to help them meet their budgets, and 58 percent say the states should fix their own budget problems by raising taxes or cutting services. These opinions, the researchers say, are little changed from 2003.

The hitch in public opinion is this: By large majorities, they oppose cutting public primary and secondary education funding (73 percent) and funding for police, fire and other public safety programs (71 percent). Nearly as many (65 percent) oppose cutting health-care services provided by the state or local government. There is more support for cuts in funding to maintain roads and transportation systems than for other options, but it is only a slight difference: More oppose (50 percent) than favor (43 percent) reducing transportation funding.

Raising taxes also is generally rejected as a way for states to balance budgets: 58 percent oppose that option.

So how do they think the states should manage to keep afloat? Cut, they seem to be saying, only not anything that's really important -- which, it turns out, is the lion's share of the state budget.

Can you fill a $140 billion fiscal hole?

Researchers at the Center on Budget and Policy Priorities issued a report on June 29, with a very downbeat title: New Fiscal Year Brings More Grief for State Budgets, Putting Economic Recovery at Risk. The report notes that the states' cumulative budget shortfall will likely reach $140 billion in the coming year, "the largest shortfall yet in a string of huge annual gaps that date back to the beginning of the recession." Here's a chart that puts the year in perspective:

CBPP: Recover Act aid and state deficits

Moreover, about 30 states may have to revisit their fiscal 2011 budgets to compensate for the loss of expected enhanced federal matching Medicaid funds that were in a jobs bill. (There is still hope that Congress may rethink the issue in the next few weeks.) The spending cuts that would be needed for states to meet their balanced-budget requirements could cost the economy up to 900,000 public- and private-sector jobs, according to the CBPP report. Within days of that report, a lean Massachusetts state budget ($160 million less in local aid than last year) forced cities and towns across the state to lay off hundreds of librarians, police, teachers and other workers to keep their books in balance. According to news reports, more drastic layoffs were averted largely by union concessions that included pay cuts, deferred raises, unpaid furlough days and changes in health-care plans.

Although some states are reporting surpluses, the CBPP researchers don't see that as heartening. Rather, they say it gives a "misleading impression that a state's fiscal health has returned when that is not the case." End-of-year surpluses, the researchers note, "occur when revenues come in higher than the amount the state estimated when the budget was enacted or revised. The revenues available for FY2010 state budgets were far below normal levels and well below the levels needed to meet ongoing funding needs. A state that cut its budget dramatically to address the resulting shortfalls could see a positive ending balance for the year 2010 if actual revenues come in somewhat above estimates. In most states revenues will continue to fall far short of spending needs in fiscal years 2011 and beyond."

Budget pressures aren't any better locally. Fairfax County, Va., one of the wealthiest counties in the country, has just passed a budget that is 5 percent smaller than last year's. The county gets there by laying off workers -- teachers and others.

Congress takes a closer look at muni bonds

Congress has been working to move the reconciled financial reform bill through both houses. The key Senate vote could take place within days. Within that bill are sweeping changes for the municipal bond market. An article by the Bond Buyer highlights some of these impending changes for the muni market:

  • The Commodity Futures Trading Commission would write rules for the registration of, and business conduct standards for, swap dealers and major swap participants in the municipal and other markets. It would also formulate a code of conduct for dealers that enter into swaps with "special entities," which include states, localities and pension funds.
  • The Municipal Securities Rulemaking Board (MSRB) would have to ensure that a majority of its members are representatives of the public -- individuals who generally are not employed or directly tied to dealers or advisers -- including at least one representative of issuers, one representative of retail or institutional investors and one muni expert.
  • The Securities and Exchange Commission (SEC) would register financial advisers, and the MSRB would write business conduct standards, professional qualifications and a "fiduciary duty" rule for them.
  • The bill authorizes, but does not require, the SEC to direct the Financial Industry Regulatory Authority to collect assessments from dealers to fund the Governmental Accounting Standards Board. The GASB currently is funded through voluntary contributions from state and local governments, as well as by revenue from the sales of its publications. But it is constantly short of funds and its dependence on issuers is seen as a conflict.
  • The bill would require the congressional watchdog, the Government Accountability Office, to evaluate the role and importance of GASB within 180 days of the bill's enactment. In addition, within 18 months, the GAO would have to report to Congress on the municipal market, including an analysis of trading, and to send Congress another report within two years on whether legislative changes are needed to improve muni disclosure.

Getting dunked by LeBron

Just when you thought you were done hearing about LeBron James and his decision to play basketball in Miami, there's this: The fiscal loss to the economy of Cleveland and its surrounding area will be close to $200 million this coming basketball season.

LeBron's departure is likely to shrink the crowd at the basketball arena to the size it was before he arrived: a little under 14,000 fans a game. That's 6,500 fewer people buying tickets, paying for parking, eating in restaurants and toasting the team at local bars. Cleveland's convention and visitors bureau estimates that the average fan spends $180 per game to see the Cavaliers at home. So, the smaller crowd would cost businesses $1.2 million per game. Bottom line: Cleveland merchants are out $48 million -- and the city is out the sales tax on those purchases.

Then there's the playoff effect. John Skorburg, an economist at the University of Illinois at Chicago, estimates a James-led playoff team would sell out the arena and that 5 percent of the area's population would watch the playoffs -- eating, drinking, bar-hopping, renting cars and buying jerseys. That averages about $100 per person. Skoburg figures that without a playoff team -- that's what the sport experts expect of a Cleveland team without James -- a total of $150 million won't be spent and won't be subject to a sales tax that could beef up Cleveland area coffers.

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