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Analysis/Comment Last Updated: Jan 4, 2011 - 1:34 AM

Dr. Peter Morici: US state and local governments face daunting budget challenges
By Professor Peter Morici
Jan 4, 2011 - 12:01 AM

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Dr. Peter Morici: US state and local governments face daunting budget challenges that require cuts in services and benefits to the poor and middle class.

Local governments reaped bonanzas from rising property values and taxes. They added services, tightened regulations and hired more employees. Schools added nonessential programs and stricter supervision of teachers, further bloating payrolls.

The housing bubble burst and property values dropped an average of 35%; but mayors and school superintendents view as essential too much of what they do.

State governments, relying more on income and sales taxes, were not as flush. The Internet and globalization make those taxes tougher to collect. Washington has been busy imposing expensive mandates on states - - especially in Medicaid, education and environmental standards - - without sending enough money to pay for those.

In 2010, 29 states and many localities raised taxes and increased fees on everything from soda to hospital beds, but often those drove away business, increased unemployment and didn’t much alleviate budget woes.

In 2011, things get worse, even as the national economy recovers modestly. Federal assistance to the states from the 2009 stimulus is expiring.

In many areas, assessed values on properties are adjusted only once every several years, so assessments will only now fully reflect the collapse in housing prices, and property taxes will fall further. And foreclosure sales are pushing down prices further in many localities.

Investors are getting skittish about state and municipal bonds. Governments have unfunded pension liabilities nearing $3.5 trillion, and many are selling off assets to temporarily plug budget holes, but lack viable plans to permanently fix finances.

State and municipal governments must slash spending and opt out of matching federal programs where they can, or they will not be able to borrow at affordable interest rates and risk default.

In Georgia, benefits like the HOPE scholarship will be curtailed for middle-class families. That will raise college costs and burden families just like higher taxes.

We can all expect somewhat higher taxes and fewer benefits and services. Like the rest of us, governments need to do more with less.

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone




America's state and municipal governments must slash spending, says Peter Morici, professor, Robert H. Smith School of Business at University of Maryland. He outlines the consequences should they fail to do so, with CNBC's Martin Soong & Sri Jegarajah:

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