States, Localities Face a 'Lost Decade'

Economic recovery will be slow, subduing any ambitions state and local governments may harbor to play a role in shaping national policy.
March 2010
Peter Harkness
By Peter Harkness  |  Founder, Publisher Emeritus

Even as the economy stabilizes, the fiscal news from states and localities could hardly be gloomier. What's worse, it will be a long time before we return to anything approaching normal. In fact, the terms you keep bumping into now among government leaders and in the media to describe what's going on are the "new normal" and the "lost decade."

Economically we've already experienced a lost decade, with no job creation, declines in real median income and household net worth, and investment skewed toward oversized houses in sprawling exurbs rather than in seeding future economic growth and jobs.

Now we face what Ray Scheppach, an economist and executive director of the National Governors Association, refers to as our next "lost decade," meaning that "states will not fully recover from this recession until very late in this decade." Revenues probably won't recover until 2014, and will then take another two years or so to pay for deferred costs for public pensions, health benefits and the like.

The collapse in revenue is so severe that it likely will change the balance in our federal system, subduing any ambitions state and local governments might harbor to play a role in shaping national policy.

States already have had to close budget gaps of almost $186 billion, yet new shortfalls are appearing everywhere. And the pain has moved downhill fast to our cities and counties, though arguably they will start to bounce back faster since they aren't burdened by surging Medicaid costs.

Stimulus funds from the federal government have helped soften the blow, but they will wind down as the year proceeds, and already reports of more layoffs and furloughs abound. Some governments are doing desperate things. Arizona is planning to sell and then lease back its state Capitol and other buildings. Miami-Dade County, Fla., has stopped paying for dialysis treatments for indigent patients with failing kidneys.

So even as President Barack Obama is proposing a freeze on discretionary spending, more governors and mayors are calling for additional help. In January, the U.S. Conference of Mayors meet in Washington, D.C., and called on the federal government for "another stimulus infusion," as the mayor of Charleston, S.C., Joe Riley, put it. That probably was a poor choice of words because the idea of a second "stimulus" isn't popular in Congress, particularly in the current political environment. Chances seem decent for passage of legislation intended to create jobs, with some additional aid for subgovernments.

Still, a little more help here or there doesn't change the overall equation. In the face of such a severe recession that has so crippled our public sector - and promises to continue to do so for some time - the balance of influence between Washington, D.C., and the states and their localities has changed. Last year, for the first time, federal grant money surpassed all other revenue sources - income, sales and property taxes - for states and localities. That trend is likely to continue.

Some in Washington argue that a dominant federal government wouldn't be so bad, that the nation needs more uniformity in its efforts to educate children, provide health care and other social services, and combat pollution. But the direction of policy tends to tack back and forth in Washington depending on who's in power. Most innovation and experimentation in recent decades has occurred at the state and local levels, rarely in the nation's capital. And it's the state and local work forces that administer most federal programs, so as layoffs and furloughs spread, those agencies are increasingly hard-pressed to keep up with the crush of unemployment compensation claims, food stamps and other stitches in the safety net.

What's needed is a structural change in the federal system: either a new sorting out of who does what, or the institution of a federal grant program that automatically is triggered when economic conditions deteriorate. As intergovernmental expert Paul Posner has pointed out, the "United States is one of the only federal systems in the world without a general-purpose fiscal assistance program," yet no one in Washington is likely to endorse it.

In his State of the Union address 28 years ago, President Ronald Reagan proposed a grand swap with the states. The federal government would take over complete responsibility for the Medicaid program and hand off all social welfare programs and food stamps to the states. At the time, Medicaid accounted for less than one-quarter of federal payments to state and local governments. Today, together with the State Children's Health Insurance Program, it accounts for about 45 percent of total federal payments.

It was a deal the states should have grabbed. But they didn't. Now Marcia Howard, executive director of the Federal Funds Information for States service, points out that if the feds and the states could make a similar swap - Medicaid and children's health care for education aid, transportation, housing and community development, and remaining human services programs - it would come out about even. Not only that, but there would be significant savings in bureaucratic overhead. "The current system of federal grants-in-aid is cumbersome and expensive," Howard argues. "But good policy is one thing and good politics is another. This may be one of those great ideas whose time will never come."

Sadly that's probably true.

Peter Harkness
Peter Harkness | Founder, Publisher Emeritus |