Out of the Shadows


by Deidra Krys-Rusoff Senior Vice President

State and local governments have finally emerged from the shadows of the Great Recession.  This debilitating time period had drastic effects on regional economies – high unemployment and low corporate profits shrunk government coffers.  Cash flow that would usually flow to infrastructure and pension plans was diverted to aid unemployed voters and plans to spur economic recovery.  Government spending was reined in and slack was removed from budgets.  The slowly improving economy has produced steadily increasing tax revenue, which is allowing municipalities to return to a more normal spending pattern. Today, municipalities are operating in a much different environment – economies are healing, general municipal revenue is up, and state and local governments are balancing budgets and shoring up reserves.

Property values have increased in most regions, which directly improve the value of the local tax base.  Growing consumer spending has led to overall local economies expansion, which drives sales and corporate tax receipts.  Significantly lower gas and energy expenses are positively impacting the bottom line.  Municipalities are also utilizing technology advances and automation to increase efficiency and keep a lid on new hire and future pension costs.

The improving municipal revenue landscape has been rewarded by rating agencies. Bloomberg reported that Moody’s Investors Service upgraded more U.S. municipal-bond ratings than it lowered last year for the first time since 2008, in what the company called a sign of an “improved credit environment for most public finance issuers.”  S&P reported similar rating upgrades.

Revenue growth has outpaced expected growth for several states.  The National Association of State Budget Officers reported that state general revenue increased 24 percent between 2010 and 2015.  This growth has triggered budgetary mechanisms that allow taxpayers to be repaid when certain benchmarks are exceeded, an outcome of taxpayers placing restraints on government spending.  Oregon will pay out a “kicker” to taxpayers in excess of $400 million. Colorado and North Carolina will also be refunding or reducing income taxes for 2015.   Other states with similar laws include Oklahoma, Missouri, New Hampshire and Massachusetts.

While general fund revenues have rebounded, the gains have not restored the revenue declines of previous years.  According to the National League of Cities 2015 City Fiscal Conditions report, “When compared to the 1990 and 2001 recessions, it is clear that the fiscal impacts of the 2007 recession are much more substantial, both in terms of depth and duration.  As a result, evidence suggests that cities are more fiscally conservative than in recent years and are cautiously preparing for the next economic downturn.”  It is possible that a fiscal shift has occurred and that the lessons learned during the recession will continue to influence municipal budget-makers for years to come.

Our Takeaway for the Week

  • Property values have increased and sales taxes are increasing, thanks to cautious consumer spending
  • The fiscal impacts of the Great Recession continue to influence municipal budget-makers