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