States' Budget Woes Will Be `Just as Tough' in 2011, Fed Economist Says

Bloomberg:

Tepid economic growth and demands for aid from ailing U.S. cities and towns will combine to make next year “just as tough” for state budget makers, according to Yolanda Kodrzycki, an economist at the Federal Reserve Bank of Boston.

States have closed budget deficits totaling about $169 billion since July 2008 and still face a combined $127 billion gap through fiscal 2012, according to a report last month by the National Governors Association and the National Association of State Budget Officers.

Fiscal recovery will be weighed down by “lackluster” economic growth of about 3 percent a year and the need to help local governments confronting falling property tax collections, Kodrzycki told governors gathered yesterday in Boston.

“Next year is going to be just as tough” for balancing state budgets, Kodrzycki said on a panel on economic development at the National Governors Association meeting. Even if economic growth quickens, it’s not completely “translating into fiscal recovery,” she said.

The housing market will also weigh more on states because their cities and towns face “much greater weakness in property tax revenues than we’ve seen to date,” she said. Property tax collections dropped in the first quarter for the first time since the onset of the real-estate market’s crash, to $107.7 billion from $108.4 billion a year earlier, the Census Bureau said on June 29.

Double-Dip Recession

Local governments count on property taxes for most of their revenue while states depend on income and sales taxes. Cities and towns will be demanding more local aid from their state lawmakers next year, Kodrzycki said

South Carolina Governor Mark Sanford said the “worst is yet to come” for the states because the economy is bound to fall back into a recession as government spending contracts both in the U.S. and elsewhere.

Kodrzycki said researchers at the Fed have become “much more sensitive” to the prospect of a so-called double-dip recession. She said the economy needs to grow at an annual average rate of about 4 percent in order for the unemployment rate to fall back to 5 percent by 2015.

“The road to economic recovery is a long one,” she said. “It’s a sobering picture.”

Posted via email from Jim Nichols