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Posts By Kim Rueben
As Senior Research Associate at the Urban Institute Rueben examines issues of state and local public finance focusing on state budget issues, intergovernmental relations, municipal bond markets, capital markets and the economics of education. She is also an adjunct fellow at the Public Policy Institute of California.Links: http://www.urban.org/KimRueben
| Posted: March 21st, 2014
Last year, I had the privilege of serving on the District of Columbia’s Tax Revision Commission, chaired by former mayor Tony Williams. On Monday, the Tax Policy Center will host a panel to discuss our broad-based effort to rework DC’s often unwieldy revenue system. To prepare, I looked more closely at how the personal income tax plan would affect different income, age, and family groups.
But first some thoughts about the overall package. Not surprisingly, the plan would create both winners and losers. But because it cuts overall revenues from personal and business taxes, most households and businesses would come out ahead.
While the DC economy is booming, the city faces some real revenue challenges. Thanks to the massive federal government presence, along with a large number of universities, hospitals, and other non-profits, much of the city’s potential tax base is off limits. Plus Congress has barred DC from imposing a commuter tax on the many high-income suburbanites who come into the city to work each day (and use city services). Finally, given federal budget constraints, federal spending in the district will probably diminish over time. Thus we introduced a service fee based on the number of employees, using information employers already report for existing unemployment insurance programs. The fee will increase costs for non-profits and some firms that don’t pay business franchise taxes, but recognizes that all workers and companies benefit from district services.
My fellow commissioners represented a wide range of backgrounds, from business executives to advocates for low-income families and even some academics. In the end, we unanimously agreed to a reform plan. And it did my public finance heart good to hear many of the commissioners repeat the tax economist mantra; “broaden the base and lower the rates.”
After seven years volunteering to prepare tax returns for low-income residents, I was most focused on the District’s individual income tax. The current system is very complex, in part because DC uses different filing statuses than the federal return. We simplified filing by conforming DC law more to the federal rules. For example, we matched federal filing statuses, personal exemption levels, and standard deductions and eliminated some deductions or credits that were used by few taxpayers or benefitted specific groups. Like the federal rules, our plan has different income brackets for different types of households. In general, our expansions to the personal exemption and standard deduction more than offset any tax increases these changes would cause.
We would also create a new middle income tax bracket (6.5% rate reduced from 8.5%) and expand the earned income tax credit (EITC) for childless workers, foreshadowing a major proposal in President Obama’s budget. This was done to make the system more progressive. The EITC has been effective in helping families with kids; it could also improve work incentives for households without children who are largely left out of the current credit.
Most filers will pay lower income taxes, benefitting from the higher deductions and exemptions and the new tax brackets. About 99% of filers with income under $100,000 and over 95% of all filers would pay less tax in 2015. Here is how it looks for various groups:
Single vs married taxpayers
Although we start the top two tax rates at lower income levels for singles and married couples filing separately than for joint filers and heads of household, the vast majority of individual filers would receive tax cuts under our plan. Even among singles with income over $350,000, over half would pay lower taxes than they do today.
In general, married couples would benefit from the new 6.5% bracket. But about half of couples with income over $200,000 would pay an average of about 3 percent more in taxes in 2015. One reason: We’d eliminate DC’s filing status of “married filing separately on the same return,” which allows couples to split income but often confuses taxpayers and ends up leading them to choose a filing status that is less than optimal.
Taxpayers over 50
Most older taxpayers would also benefit from the middle income tax bracket and the higher standard deduction and personal exemption. Many low-income people between the ages of 25 and 65 would also benefit from the expanded childless worker EITC. Similar to the current changes being considered in Maryland, our plan would also increase the estate tax exemption from $1 million to $5.25 million to match the federal threshold . This would benefit higher income households, or at least their estates.
We propose eliminating the long-term care insurance premium exclusion and the $3,000 exemption for District and federal pension payments. Both may increase taxes for some seniors, though the higher standard deduction and personal exemption will offset the impact for most.
It was a real treat for me to be involved with on-the-ground policymaking. To learn more, join us Monday.
Filed under: Economy |Tags: DC, Tax Policy Center, taxes, Urban Institute, Washington Add a Comment »
| Posted: July 19th, 2013
Detroit filed for Chapter 9 bankruptcy protection yesterday, giving it the dubious distinction of being the largest municipal bankruptcy ever. By doing so, the city has put its future—and that of its citizens, employees, retirees, bondholders, and other creditors-- in the hands of a federal judge. How did the Motor City get to this sad place, and what will it mean for other cities?
How did this happen?
Detroit has been in decline since the 1960s, when auto plants began to close and the city started hemorrhaging jobs. Its population declined from 2 million in 1950 to less than 700,000 today. But the city was slow to reduce its public payroll, and its retiree obligations have exploded. The city has been spending about $100 million more than it’s taken in over the last five years. It currently has an estimated $18.5 billion in long-term liabilities—nearly half of which are for retiree benefits ($3 billion for pensions and about $6 billion for health care and other benefits).
Was this bankruptcy inevitable?
Probably. Last spring, the state appointed veteran bankruptcy lawyer Kevyn Orr to serve as the city’s emergency manager. But Orr was unable to convince creditors to work out the city’s obligations, and individual lawsuits have been piling up.
The crisis has been building for years. Not only is Detroit’s population shrinking, but those who stayed are older and poorer and thus need high levels of municipal services. The city struggled to provide those services while meeting prior obligations.
But by delaying the day of reckoning, it very likely made matters worse. Detroit borrowed to pay for both current operating costs and pension obligations. Government officials also increased retiree benefits when negotiating labor contracts for public employees, trading off future payments for current needs. They ignored an important rule of budgeting: When in a hole, first stop digging.
Will Detroit salvage its finances and move forward?
Bankruptcy is the right move for Detroit. It is the only forum where public sector unions, retirees, and debt holders can work out their competing demands. In the end, it is likely they all will have to face reductions in payments.
Despite the headlines, bankruptcy does not necessarily mean the city’s bonds will default. Indeed, Chapter 9 can be a mechanism for borrowers to avoid default. However, Detroit faces a series of stark choices. If bondholders take a haircut, the city’s cost of future debt will rise, limiting its ability to invest in a new Detroit. But if the bulk of the settlement falls on public employees and retirees, what will that do to the city’s ability to hire the police officers, firefighters, and teachers it needs to attract new residents?
In the end, it’s likely the state will have to step in to help make pension payments, guarantee future borrowing, or both. However, if its creditors are satisfied, Detroit can learn some lessons from New York and Washington, D.C.—two cities that went to the financial brink and ultimately thrived. Both recovered thanks to tough new financial controls, transparency, and hard choices.
Is this beginning of a new wave of municipal bankruptcies?
Probably not. Other Rust Belt cities face the same demographic and pension issues that hit Detroit. But because of state requirements, some, like New York, have kept up pension contributions while others, like Cincinnati and San Diego, have introduced reforms to try to stem growing obligations.
It’s also important to note that most jurisdictions that have declared bankruptcy or threatened to do so were responding to the fallout of specific ill-advised projects, not to the kind of existential threat that Detroit is confronting. For instance, Harrisburg, PA’s highly publicized troubles are largely the result of a money-losing municipal incinerator project. Fortunately, there are not a lot of Detroits out there.
Photo courtesy Flickr user Martin Gonzalez (CC BY 2.0)
Filed under: Economy |Tags: bankruptcy, Detroit, Tax Policy Center, Urban Institute 1 Comment »
| Posted: December 21st, 2011
With apologies to Charles Dickens, I’d like to tell a Tale of Two States. Earlier this month, on December 5, California Governor Jerry Brown and New York Governor Andrew Cuomo both announced that, even though state revenues in general were rebounding, they were both facing budget shortfalls. This isn’t totally surprising since earlier in the recession both states passed temporary tax increases that had expired or were about to, and both depend heavily on progressive income taxes. Both governors announced a desire to respond to forecast budget deficits with tax changes, including increasing income taxes on high income households. But that is where their tales part ways.
Last year, throughout the budget season, Brown couldn’t get the legislature to extend California’s expiring tax increases. He failed both because state revenues were stronger than anticipated last Spring and, more importantly because it took a supermajority of the legislature to pass tax increases. The budget the legislature did pass assumed these strong revenues would continue, even though the source of those extra dollars wasn’t totally understood. Indeed, the budget included an additional $4 billion in unspecified revenues that if not realized would trigger automatic spending cuts.
Well, after a bumpy summer and even bumpier fall, the Legislative Analyst’s Office projected actual revenues will fall $3.7 billion below forecast and help produce a 2012-2013 budget shortfall of $13 billion. That would trigger the large automatic cuts in higher education, social services, and K-12 education. In response Brown announced that he’ll bypass the legislature and ask voters to approve a retroactive tax increase in November 2012.
While some spending reductions will still kick in, late-year revenue increases mean these cuts are smaller than originally expected. However, bigger budget cuts will depend on what voters decide next November, including whether to retroactively raise income taxes and increase the sales tax. However, the presence of numerous other tax proposals might make passage harder. In any event, this year’s budget debate will be interesting, with legislators forced to consider what happens if the ballot measure doesn’t pass.
In contrast, Cuomo proposed comprehensive reform of New York’s tax code. Although he has cut spending and won concessions from labor unions, the state still spends more per capita than nearly all other states and it faces a $350 million shortfall for this year and a projected $3.5 billion deficit next year.
With a temporary surcharge on incomes above $200,000 expiring at the end of this month, Cuomo hoped to make the state income tax more progressive by permanently increasing top marginal tax rates from their pre-surcharge levels (though importantly they’d still fall from what they are today). At the same time, he wanted to lower rates for middle-income taxpayers, streamline other provisions of the code, and restore funding for some government programs. Thus, revenues would go up, Republicans could claim that tax rates will be lower than they are now, and Democrats could take credit for a more progressive tax system and some new spending. Cuomo negotiated his tax reform with just two people – the Republican Senate majority leader (Dean Skelos) and the Democratic Assembly Speaker (Sheldon Silver). The often dysfunctional state legislature approved the whole package within a week.
Cuomo definitely benefited from the timing of the expiration of the temporary tax increases. The recovery looks more uncertain now than it did last year, and by revising rates before the surcharge expired he framed the package as a tax cut. In theory Jerry Brown could also negotiate a deal with a subset of legislators, leadership from both parties in both houses – a gang of five, instead of three. However, in practice often in California, agreement isn’t reached or legislators defect and a deal isn’t kept. Requiring another trip to the ballot box.
Fiscal institutions and rules matter. But as Cuomo proved, good timing and some legislative hardball are just as important when it comes to budget reform.
Filed under: Government Add a Comment »
| Posted: November 29th, 2011
I spent much of the last couple of weeks travelling around the country to discuss taxes, spending, and the economic future of specific locales. I started in Westchester NY, where local officials are trying to decide whether to override the state’s new property tax cap to maintain services at current levels. Some tax increase proposals would do just that, but others may be designed to score political points against Albany and illustrate that the caps passed in last year’s budget deal are more cosmetic than real.
I then went to New Jersey to discuss its economic future. While others made the case against a millionaires' tax I made the slightly unpopular proposal that New Jersey should embrace its high tax, high service, and high income profile. New Jersey has one of the nation’s highest per pupil spending levels. Maybe there’s room to cut and reform, but spending has given the state good schools and the highly educated work force needed to staff its industrial mix of finance, pharma and health care, and tech.
I ended the week in Las Vegas, visiting my parents who like many New Yorkers left the snow for the double lure of better weather and lower taxes. They illustrate what might be a natural progression of people leaving the Northeast to retire. Indeed, the most compelling evidence about the migratory effect of higher taxes concerns retirees, who are the most mobile. While taxes are low in Vegas, some of the shine has definitely left Nevada, with high foreclosure and unemployment rates. Nevada is still reeling from the Great Recession, especially since its lifeblood consists largely of construction and tourism, two sectors especially hard hit. Nevada got by as a low tax, low spending state partly because its good jobs in tourism and construction didn’t require many educated workers. The state’s public services were paid for mainly by visitors as sales, hotel and gaming taxes and there is no income tax. Now, Nevada is trying to remake itself as a more diversified economy, though restrictive rules on passing new state taxes mean it’s unclear how Nevada will pay for government services, including investing in schools to create this new diverse (and better educated) workforce.
In the middle, I went to New Orleans to talk taxes. While enduring serial disasters, including hurricanes and oil spills, New Orleans offers a lesson in hope. While the devastation Katrina wrought was tremendous, it did manage to sweep away the inertia that had kept a failing school system in place. As recounted in a terrific and inspiring speech by Scott Cowen, president of Tulane, the silver lining to New Orleans’ clouds may be a revamped school system with higher test scores and graduation rates and a more engaged citizenry. New Orleans still has a high poverty rate and too many disengaged youth, but the city is moving in the right direction. As President Cowen noted, a more prosperous future requires first fixing the schools.
And that remark leads to an important lesson for most places. If public officials really understood that taxes and public spending are set in tandem and that public investment, especially in our kids, is the foundation of a bright future, more of them would bet on their kids and future prosperity would be less of a crap shoot.
Filed under: Government, Urban Culture Add a Comment »
| Posted: October 25th, 2011
Last month I blogged about how the federal and state governments could learn from cities, which seemed to be making the tough choices and balancing their budgets without politicizing every move. This month, alas, I’m honor bound to report that some cities (and states) aren’t above the political fray.
Exhibit 1 – Harrisburg. The capital of Pennsylvania has been having money troubles for the last few years, and has been on the short list of places most likely to go broke. Earlier this month the shoe dropped, and the city declared bankruptcy. Or at least the city council did – the mayor is against it and so is the state. This has led to a series of announcements from different parties on whether or not Harrisburg is in bankruptcy, who gets to declare bankruptcy, and whether the city council can choose bankruptcy court over accepting a state takeover plan. The council members thought the state takeover would leave the city in worse shape, paying off bondholders while destroying the city’s ability to meet service needs. It also included veiled threats about state officials needing to learn how to put out literal instead of figurative fires, if the sale of assets to pay debtholders led to a lack of firefighters.
The problems in Harrisburg largely stem from an investment project gone wrong – an incinerator upgrade that was supposed to generate revenues through generating power that never materialized. With the current antipathy for Wall Street the council members think they are better off in bankruptcy court, which could lead to bondholders taking a loss and possibly lower the cost to taxpayers.
Exhibit 2 – Scranton. While much less extreme an example than Harrisburg, Scranton’s city council and mayor came up with competing proposals to solve its budget deficit that involve either selling the parking meters (to the parking authority) or borrowing against meter revenue to get a one-time payment to balance this year’s budget. Either plan would generate the $6.5 million to plug this year’s deficit. The only problem with this strategy is that next year’s budget deficit is probably going to be even bigger and then what? This strategy either sells off an asset or commits a decade’s worth of revenue to pay for this year’s problem.
So does this mean we are on the brink of a spate of local bankruptcies? No, although the National League of Cities reports cities ending fiscal year 2010 with the largest year-to-year reductions in general fund revenues. However, most cities balanced their budgets by making even larger cuts in spending. And in what might reflect city officials recognizing a “new normal” in city budgeting, a smaller share of them report that they are less able to meet financial needs, even though revenues are down for the fourth year in a row (in real terms)—just 57 percent of cities this year, down from almost 90 percent two years ago. Revenues are going to be tight but in most places, officials are making hard decisions and cutting real programs as well.
Yes, politicians in Harrisburg may be throwing metaphorical cream pies at each other, but most other cities are cutting the mustard.
Filed under: Economy, Urban Culture Add a Comment »
| Posted: September 20th, 2011
As the discussion around federal budget reform gets more heated and political and thoughtful action seems harder to enact, could federal policymakers take a page from cities on how to make tough decisions and put the nation on a better fiscal path? This idea struck me while attending a meeting sponsored by the German Marshall Fund and the Urban Land Institute that kicked off at the Cannon House Office Building just as the President was announcing his jobs plan to a Joint Session of Congress. While federal officials seemed to be talking past each other and rolling their eyes, city officials talked about how they passed budgets that balanced and took tradeoffs between current spending, future obligations, and future growth into account. The conference “Local Leadership and Innovation during the Financial Crisis” featured frank discussions of actions taken on both the revenue and expenditure side of the balance sheet.
For example, Atlanta mayor Kasim Reed talked about cutting services and focusing on the city’s primary responsibilities – police, fire, trash, and basic services. Atlanta has laid-off workers and taken steps to shore up its budget balance, which is predicted to go from a $48 million shortfall last year to a $70 million surplus in two years. But the city is also cooperating with other regional local governments to invest in new infrastructure to help ensure future regional growth.
Mayor Reed spent much of this year and his political capital working on public-employee benefit reform. Facing a $1.5 billion difference between system assets and benefits, he convinced both workers and the City Council to act now to stave off future insolvency. Here’s how the unanimously passed compromise worked out: current employees in the pension plan contribute an extra 5 percent of their compensation to keep current pension benefits. New personnel (including fire and police personnel) enroll in a hybrid plan requiring more employee contributions, a smaller multiplier for the defined benefit plan, and a 401- K plan that includes mandatory employee contributions and an employer match. Retirement ages for new employees go up.
Like other cities and states that expanded benefits in recent years, Atlanta had a problem. Pension upgrades in 2001 and 2005 led funding ratios there to drop from over 90 percent funded to slightly over 60 percent funded. While union representatives and workers aren’t thrilled to have to contribute more to their retirement fund, the mayor argued compellingly that there was no other way to make sure the funds stayed solvent. The mayor had wanted new employees to be in a defined benefit plan but was willing to compromise with the adoption of the hybrid plan and added employee contributions.
Officials in other cities also swapped stories of launching program reforms involving both budget cuts and tax increases. Akron’s mayor talked about having to sell a tax increase to voters. So did city managers from Virginia and North Carolina. Voters and residents seemed willing to increase property tax rates (typically, to keep tax revenues at current levels despite falling property values). For example, the city manager of Hampton, VA recounted holding public meetings where residents could weigh in on budget issues and finding out that the public could understand the trade-offs between wants and needs and tax increases. These budget meetings and posting the trade-offs on line for residents to view smoothed the actual budget process.
What really rang through the conference and prompted my proposal to have cities teach state and federal policymakers was a resounding emphasis on the need to inform and reach agreement among both political parties and among public officials, employees, and the public. That’s a vital and too often missing ingredient in federal and state budget policy-making.
Filed under: Assets and debts, Government 2 Comments »
| Posted: August 19th, 2011
Financial markets have been on a pretty turbulent roller-coaster following the last minute bargain Congress struck to forestall a debt crisis, S&P’s downgrade of US Treasuries, and economic uncertainty in Europe. Most discussion has focused on national issues but it’s important to ask what this all means for state and local governments. State and local budgets are still pretty tight, with revenues well below 2008 levels (adjusted for inflation). But the current federal drama doesn’t seem to be compounding subnational government woes.
Most state and local officials knew that they were unlikely to get more federal aid after the stimulus funds dried up, but the actual deal struck by Congress is better than many states expected. The agreement cuts federal discretionary spending a lot but largely protects entitlements, including Medicaid (and Social Security and Medicare). New limits take the form of spending caps on discretionary spending using the Congressional Budget Office’s “current law baseline,” which adjusts for inflation. Baselines are often political creations but they sometimes matter a lot—Standard and Poor’s really blew it by assuming the wrong one—and that’s clearly the case for the cuts in discretionary spending.
The money that state and local governments get from the feds is part of “other domestic discretionary programs.” Working off of an inflation-adjusted baseline means these cuts start from a higher level and thus aren’t as bad as they could be. (In the short term—i.e., fiscal 2012—the caps on discretionary spending will slice about $2 billion from non-security programs). The debt agreement may not really solve the federal debt problem but, thanks to the magic of baselines, it doesn’t do much short-term damage to state and local programs.
As Stateline pointed out, the caps actually allow for $24 billion more in spending than the budget resolution the U.S. House of Representatives approved earlier this year. That bill, which died in the Senate, proposed cutting some state grant programs by as much as 20%.
State and local governments aren’t off the hook yet. No one yet knows how Congress will allocate these cuts across domestic programs. The Super Committee has broad flexibility to cut both discretionary and entitlement programs—and even raise taxes. But the chances of the panel reaching consensus are very small. If Congress can’t agree on $1.2 trillion in automatic spending cuts by the end of this year, the debt limit deal requires automatic spending reductions starting in 2012. But these exempt most of the mandatory spending that makes up the social safety net, including Medicaid, CHIP (children’s health program), TANF (welfare) and SNAP (food stamps). A few programs that affect state and local governments, such as education funding, early childhood assistance and affordable housing aren’t protected. But in the short term at least, the debt agreement is unlikely to do much new damage to state and local budgets.
So what about the Treasury downgrade? Despite getting the math wrong, S&P stood by its downgrade and even said that other issuance downgrades would follow. It has already cut its rating on some other government bonds, but those are largely housing development funds and bonds pre-funded by treasuries. S&P seems to think that any investment backed by treasuries is more at risk. Meanwhile, the other ratings agencies have largely left things alone.
The markets seem to disagree with S&P’s assessment. In the wild ride of the past couple of weeks, Treasury yields have fallen to half century lows, and thanks to this rush to safety, many muni yields have followed them down. Remember that many tax-exempts are still rated AAA. Thus, the rates that state and local governments must pay on new bonds are at all-time or multi-decade lows, saving issuers money. It might be odd that a subnational government can have a higher bond rating than its parent government. But when ratings are cut to reprimand Congress and the risk of default is still perceived to be close to zero, well, normal bond pricing rules might not apply.
So what will affect state and local governments’ bottom lines? The stock market tumble and economic conditions. While the current uncertainty might be good for muni-issuances, it has pushed down the return on state and local investments and will possibly cut their income tax revenues too. Specifically, public pension fund assets have lost value in the market fall, and state revenues look less rosy as capital gains turn to losses. And that will hurt states’ financial ratings. Indeed, despite recent efforts by New Jersey to cut spending, Fitch just dropped the state’s rating from AA to AA- because of outstanding levels of debt and benefit obligations.
Federal action can definitely affect how well or poorly subnational governments fare, but the current drama doesn’t seem to have had much of a direct effect—other than that caused by sending the economy and financial markets into a dizzying tailspin.
Filed under: Assets and debts, Government 1 Comment »
| Posted: July 18th, 2011
Last month, I posted about how cuts in state and local government jobs were offsetting private sector employment growth. With the release of the June employment figures last week, the story got even bleaker. Job growth in June was a meager 18,000 jobs, and the April and May numbers were also revised downward. Dashing expectations of a turnaround, overall employment gains were even smaller – basically flat for two months, largely due to declines in government employment.
Private employment job growth fell in June from a revised gain of 73,000 in May to 57,000 – with most gains coming from job growth in health care and leisure and hospitality. But these gains were mostly offset by declines in government jobs, especially in local education. These figures are seasonally adjusted – so they take account of dips in education employment in summer and upticks in employment in parks and museums. The raw numbers are even starker – even larger gains in leisure and hospitality offsetting declines in both public and private education.
Monthly Employment Gains Flat Due to Declines in Government Job Sector, June 2011
The July education drops are likely to be even more dramatic as last year’s Federal education jobs bill expires. That bill allocated an additional $10 billion in federal funds to retain or create education jobs in the 2010-2011 academic year.
The Bureau of Labor Statistics (the source of the graphs) released summary information that further breaks down information by industry. Some other highlights (or lowlights):
Mining and logging jobs have recovered the jobs lost in the recession. Currently, they’re 20,000 above June 2008 levels. In contrast construction employment is still 30% lower than at its peak 2006 level, and hasn’t changed in the past year. Manufacturing employment has been flat, which almost counts as good news given its long-term downward trend –a 30% decline since June 2001.
Unsurprisingly, given soaring health care expenditures and changing demographics – employment in health care has added 369,000 jobs since February 2010 – the nadir of private sector employment. Over 20 percent of nonfarm jobs added since then have been in health care. The employment gain in private health care and social assistance is offset by an equal decline in private education positions.
While financial service jobs have declined by 15,000 over the past month, they have been relatively stable over the last year and are 9 percent below their 2006 peak. In contrast, professional and business service employment increased by 12,000 jobs last month, and has increased by 3 percent or 485,000 positions since the prior year – largely due to increases in administrative and temporary help positions in early 2010. Indeed these jobs made up a large portion of the employment bump experienced this winter.
The government employment picture is different. Public sector employment stayed strong longer than private sector employment but has been losing jobs since autumn 2008. Last month, both federal non-postal positions and local education jobs fell by 10,000 each. State jobs have fallen too, but most losses have been in non-education positions. This pattern, especially the decline in education jobs, largely reflects smaller declines in these positions earlier in the economic cycle.
With state and local employment expected to stay weak for years, current federal negotiations over the debt ceiling and federal spending will also likely translate into more job losses. The only break to this less than sunny government jobs outlook is that state officials and public sector workers seem to be more willing to re-open bargaining agreements and substitute lower salary increases and increased cost-sharing of benefits for fewer layoffs. For example, in New York, a second public-sector union agreed to wage freezes to avoid layoffs. A first step to sustainable jobs growth might be for us to stop shedding jobs.
Filed under: Economy Add a Comment »
| Posted: June 10th, 2011
The Bureau of Labor Statistics May employment figures, released last week, show that nonfarm payroll employment is basically flat (up by just 54,000 jobs). These numbers disappoint, since employment gains in the prior three months had averaged 220,000. However, it’s important to understand what’s behind the current stagnation in employment, as the private sector is still growing.
In May, 83,000 private sector jobs were created. That uptick is smaller than it was in the prior three months (when it was almost 250,000) but still going in the right direction, though manufacturing and construction looked especially weak.
Private, State and Local Employment in the Current Recession
However, not as weak as state and local governments. Local governments shed 28,000 jobs last month and have lost 446,000 jobs since an employment peak in September 2008. State governments cut just 2,000 jobs but have shrunk by 98,000 since August 2008.
While the private sector has shed many more jobs (6.7 million or 6 percent below the peak employment level in January 2008 of 115.6 million), it’s on an upward swing. It has added 2 million jobs since February 2010.
In contrast, state and local employment kept growing at the beginning of the recession, thanks in part to the Federal stimulus program and pretty large rainy day funds. However, after three tough years, state budgets are still below pre-recession levels and employment is falling. There is also little evidence suggesting that things will be looking up for state and local employment in the next few years. More likely, local job numbers will keep falling as Federal stimulus aid ends, states keep cutting local aid and property tax revenues have started following house prices down. While a recession’s effects often hit state and local government budgets and employment after the worst is over in the private sector as noted by Donald Boyd and Lucy Dadayan of the Rockefeller Institute last summer, the employment declines during this recession have been more dramatic than earlier downturns. Local employment has fallen in only two of the past five recessions: this one and 1980. While jobs in both education and other parts of local government have been falling, the cuts in state employment have been in jobs other than education. Non-education state employment is down 3.6 percent since the recession’s start and 4.3 percent from the employment peak.
State and especially local budget cuts translate into employment changes because they spend most of their general fund money on people rather than raw materials or buying things. About half of local spending goes to wages and salaries (more if pensions and other benefits are included) so cuts in local spending mean either lower compensation or fewer people employed. Not surprisingly, the places where public employment dropped the most are those where revenues have fallen the most (and where the recession’s toll was greatest). For example, between first quarter 2008 and first quarter 2010, Nevada, Michigan, Rhode Island, and Florida all experienced a decline of over 4 percent in local government employment and California, Arizona and Ohio experienced a 3 percent decline. Georgia, Vermont, Arizona, and Rhode Island experienced a 4 percent decline in state employment over the same period.
So there’s more than meets the eye in employment figures – in this case a troubled public sector that might be offsetting private sector job creation for the foreseeable future.
Filed under: Economy, Government, Other 1 Comment »