Boston has a bit of a budget problem. The rise in remote work will cause commercial real estate prices to slowly and steadily fall, resulting in less property tax revenue and the city facing a $1 billion tax deficit over the next five years. The same problems, combined with a sustained decline in tourism, are straining San Francisco's finances. From Denver and Seattle to Washington, D.C., and New York, cities across the country are grappling with whether to cut their budgets. Some states, including California, Maryland and Arizona, are also facing financial difficulties.
Each region is dealing with its own situation, but at the root of all of these predicaments is the question of what the new normal is in terms of budgets and the services people rely on without breaking the bank. It is a struggle to figure out how to provide investment. .
“Right now, we're not in a fiscal crisis at the state or local government level,” said Justin Marlowe, a research professor and director of the Center on Municipal Finance at the University of Chicago's Harris School of Public Policy. , he told me. “I think what we're at right now is the beginning of the probably three to five years of structural adjustments that will be needed for state and local budgets in a post-pandemic, post-AI world.”
Financial difficulties for states and cities are a perennial problem. Unlike the federal government, local governments cannot run large deficits for long periods of time, and many regions are implementing balanced budget revisions. Each state has a rainy day fund. According to the Pew Charitable Trusts, a public policy nonprofit, endowments reached record highs in 38 states at the end of fiscal year 2023 (most states' fiscal years run from July 1 to June). Even with cash, there is only so much you can get, both in the short and long term.
Expiring federal funds are likely to make the fiscal outlook very difficult for many states and local governments
Recent financial difficulties have improved slightly from the past four years. When the pandemic hit, there was widespread concern that states and cities would run out of money. Instead, they started looking at the following: increase In terms of profits. The stimulus money the federal government gave to individuals through unemployment insurance and economic stimulus checks kept households afloat, and many people started spending, which boosted sales tax revenue. People's salaries increased along with income taxes. The federal government also provided financial assistance to states and cities. Now those cash sources are starting to dry up.
“With federal funding expiring, the fiscal outlook for many states and local governments is very challenging,” said Lucy Dadayan, principal research fellow at the Urban Institute's Urban-Brookings Tax Policy Center.
In some cases, states and cities used additional federal funds to launch new programs and make long-desired investments. Now they need to find a permanent source of funding. In other cases, the fund helped temporarily solve long-standing budget problems or used surplus funds to reduce taxes.
“New York City certainly used lump sum money for ongoing spending and even new programs,” said Carol, an expert on budget-strapped states and localities who has worked on budget and planning issues in New York state.・Mr. Okreireakain says. York, New Jersey, and Detroit. “There was a lot of money coming in because of COVID-19. There was a lot of fluctuation in income, so no one knew exactly how things were going to settle down. By the time people realized where they were actually going to settle down, It took time.”
On the revenue side, we saw declines in several places. Sales tax revenue has declined, primarily in downtown areas where the effects of remote work remain. The same goes for revenue related to lodging taxes and the tourism economy, and it's unclear how much of it will come back from the trade shows and conventions that drive it. Places like Arizona that passed tax cuts are now seeing those policies come back to bite them. It's unclear what will happen to property taxes, as office occupancy remains low and commercial real estate values have declined. The office apocalypse has left cities struggling to reinvent themselves and attract new interest and investment, trapping them in a doom loop that is difficult to escape.
There are also problems on the spending side. Inflation is hitting states and cities as well as people's budgets. Governments, like private companies, have to pay more for labor, medical care, and even construction materials.
“It's just increased the price of all the basic inputs for municipal operations, road salt and basic necessities,” Marlowe said. “That's an increase in costs in general. And we also have to see an increase in salaries as a result of that. And that's a big part of that.”
In large cities, the immigration crisis is also putting pressure on finances. Cities like Denver and New York are spending millions of dollars to provide housing and social services to immigrants coming across the southern border, but with border deals frozen in Congress, the issue is This is a problem that seems to have no solution in sight.
“This is not going to be cheap and no one can see the end in sight, so we don't know how many administrative adjustments we will have to make on the program,” Okreireakin said.
Although the current situation seems to be going well, the long-term outlook is a little more worrying.
Beyond more pressing problems in specific locations, widespread warning signs are flashing. Josh Goodman, a senior director at the Pew Charitable Trusts who focuses on state fiscal health, said most states that do long-term budget projections show budget shortfalls. And even states that don't expect a shortage have a pretty pessimistic outlook.
“Even if the state seems to be doing well now, the long-term picture is a little more concerning,” he said.
States and cities face pressure from social issues that will compress tax revenues and increase costs for years to come. An aging population means that the proportion of working-age people in the population is decreasing, putting downward pressure on tax revenues. States and cities must also grapple with paying for health care and social services for these people. Changes in the way Americans travel could also be an issue.
“If you look at transportation revenue, gas taxes are a big source of revenue,” Goodman said. “And as vehicles become more fuel efficient and people switch to electric vehicles, transportation budgets are challenged.”
In reality, there are often costs that cannot be predicted. Take Maryland, for example. Liz Farmer, a Pew Charitable Trusts executive who specializes in the state, said the state suffers from long-term structural deficits. Like many places, things have been fine for a few years during the pandemic. But as federal funding dries up, structural problems are resurfacing. In late March, the Francis Scott Key Bridge in Baltimore collapsed after being struck by a ship, creating a new crisis in the state's fiscal plans. The federal government has promised to step in and help, but rebuilding the bridge will likely come at the state's expense.
“There's a lot of hope that federal funding will cover most of that, but there's one other thing that Maryland is considering,” Farmer said. “They are considering emergency legislation to provide economic relief to Maryland workers who are affected by this, and it appears the state is going to dip into the rainy day fund.”
Things aren't all doom and gloom on the state and local budget front. The US is not in a recession and the macro economy is strong. We are not in a situation like 2008, where there were mass layoffs and the bottom fell to tax revenue. Each state's rainy day funds are in a reasonable position. But obviously there are some stressors. No one knows how long the immigration crisis will last, and there are no clear solutions to the deteriorating internal culture. Ultimately, what happens next will be a matter of policy. As always, politics will determine how to deal with the conflicting priorities that come with a budget. Some governments have one set of priorities, while others have another set of priorities.
“Every budget season, people write about the budget crisis,” Okreireakin said. “Budgeting is a political issue.”
emily stewart As a senior correspondent for Business Insider, he writes about business and economics.
