REBUILDING FISCAL FEDERALISM IN THE AFTERMATH OF THE FINANCIAL

CRISIS: THE UNITED STATES

Paul Posner and Tim ConlanGeorge Mason University

The Great Recession: Impact on the U.S. Federal SystemFederal deficit grows to 10% of GDP as

revenues decline and countercyclical spending increases

Sharp decline in state government tax revenues

Delayed impact on local revenues, but with wide variations; rise of municipal bankrupcies

Federal countercyclical aid totaling $285 billion moderates impact of state revenue decline, and additional aid to the financial system (TARP) ameliorates length and depth of recession.

Sharp Rise in Federal Deficit as Revenues Decline, Spending Rises

State Revenues were Significantly Reduced by the Recession butImpact on Local Revenues Delayed

State Revenue Declines Created Major Budget Shortfalls

State Budget Shortfalls Substantially Reduced by Federal Countercyclical Aid

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

20120.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Total Outlays to State and Local Governments by Category (1948-2013)

Payments for IndividualsCapital InvestmentRemainder

Source: FY15 OMB Historical Tables, Table 12.1

In B

illi

ons

of

Const

ant

FY09 D

oll

ars

Infusion of Countercyclical Aid in theAmer. Recovery and Reinvestment Act

2007 2010 % Change 2010-2007

General Revenue 2,329.4 2,502.10 7.4%Grants from Federal Government

464.6 623.7 34.2%

General Revenue From Own Sources 1,864.7 1,878.3 0.7%

Taxes 1,283.3 1,269.60 -1.1%Property 388.7 441.7 13.6%

Sales & Gross Receipts 440.3 431.2 -2.1%General Sales 300.5 284.9 -5.2%

Individual Income 290.3 260.3 -10.3%Corporate Income 60.6 42.7 -29.5%

Charges and Misc. General Revenue 581.5 608.7 4.7%

Table 1: Impact of Great Recession on State and Local

Source: US Bureau of the Census, Census of Governments, State and Local Finances Summary

Revenues (in Billions), 2007-2010

Major Federal Aid in the Recovery Act, FY 2009-2010

Political Implications of the Great Recession

Rising federal deficits and health reform initiative spur a conservative political backlash in 2010

Reinforced by growing partisan polarizationIntergovernmental politics also become

sharply polarized on partisan linesBacklash induces sharp turn toward austerityBudget negotiations will significantly cut

federal discretionary spending, including aid to States

Party Control of State Legislatures 2011

From Stimulus to Austerity:The Politics of Polarized federalism

Sharp Turn Towards Austerity

Future Federal Aid at Risk: Federal Budget “Sequester”

Long term trends in U.S. Fiscal FederalismDue to aging population and excess health

care cost growth, entitlements will crowd out discretionary federal spending, including most grants-in-aid

Rising pension costs, declining federal aid, and eroding base of state sales and gasoline taxes place chronic pressure on state-local budgets

Political resolution of these difficult issues will be hampered by continued partisan polarization and by the deinstitutionalization of intergovernmental analytical and collaborative venues

Mandatory Spending Crowds Out Discretionary Assistance

Future Federal Aid at Risk: Long term Budget Trends

Structural Weaknesses in Long term State and Local Finances

22

State and Local Pension Costs as shares of budgets

Deinstitutionalization of IGR1980

ACIROMBTreasuryGAOCongressional IGR subcommitteesAcademy for State

and Local Government

2013CBO cost estimationGAOWhither state and local

groups?

Discussion?