The city of Mesa, Arizona, fired 125 employees in 2009 as tax collections dropped amid a housing slump and a recession. Now, it is filling vacancies, training a class of police recruits for the first time in three years, and Mayor Scott Smith says he’s confident “revenue levels are going to stabilize.”
As the Phoenix suburb’s experience shows, the worst may be near an end for city and state governments, and their recovery could in turn give a lift to the U.S. economy.
After four years of shuttering fire houses, cutting school budgets and firing teachers and police, these governments are starting to steady as tax revenues rebound. Public employment at all levels declined by just 7,000 in the first two months of this year, well down from the 22,000 monthly average in 2011, according to Labor Department data.
“We’re at a point where we’re nearing the bottom,” said Christopher Hoene, director of research with the National League of Cities in Washington. While some cities still are shrinking staffs, others are “not that far off from some of them hiring again. In the sense of the business cycle for local governments, the curve is starting to change.”
The shift could ease the drag from public-sector cuts that have weighed on the national economy, which has been adding private-sector jobs at an average rate of 214,000 a month for six months, according to Labor Department data. March numbers are being released April 6.
Tax Collections Hit
While the Federal Reserve cut interest rates to record lows and President Barack Obama’s $831 billion stimulus poured money into the economy, including funds that saved public-sector jobs, officials in state capitols and city halls were forced to balance their budgets when the recession dealt a hit to their tax collections. With the economy accelerating, tax revenues are on the rise, which is helping to ease some of the fiscal strains.
“We are at the cusp where the drag from the government sector is effectively going to be zero,” said Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who tracks tax receipts in developing his forecasts.
State and local tax revenue rose 4.5 percent last year, the biggest gain since 2006, and property taxes have increased for two consecutive quarters, Census data showed March 22. Since 2009, state and city cutbacks have restrained the economy’s growth more than any time since the early 1940s, according to Commerce Department data.
“Municipalities are still in big financial trouble, but they have cut back so much since 2008, especially among education workers, that I cannot see much more room for further cuts,” said Francesca Panelli, an economist with Banca Aletti & C SpA in Milan, Italy, who was the most accurate forecaster of U.S. payrolls in the two years ended March 1, according to data compiled by Bloomberg.
Olivia Penn-Person, 56, of Columbus, Georgia, who has more than 30 years of work in social services and teaching, put out “hundreds” of applications and had around 30 interviews since 2008 before landing a position in Columbus in February as a full-time substitute teacher.
“Whether it was state, federal or city jobs, they put a freeze on hiring because they didn’t have the money because of the economy,” said Penn-Person, who had quit as a teacher in 2008 in Warner Robins, Georgia, about two hours away, when her husband was transferred. Now, “things may be picking up a little.” In her new post, “the pay is not great, but it helps with the bills.”
Government employment has declined by 689,000 jobs since April 2009 after increasing by 756,000 the prior three years, Labor Department data shows.
Total public employment probably will rise by a few thousand jobs a month in the second half of 2012, forecasts Deutsche Bank, while IHS Global Insight projects an increase in 2013’s first quarter and Moody’s Analytics predicts a gain for next year.
Fed Chairman Ben S. Bernanke cited the improvement in a March 26 speech on the employment outlook.
“Layoffs in the public sector appear to be moderating,” he said in Arlington, Virginia. While labor-market trends have seen “positive signs,” reducing 8.3 percent unemployment further may require more rapid growth, he said.
U.S. employers added about 201,000 jobs in March, based on the median in a survey of 75 economists by Bloomberg in advance of the April 6 report. That included a 215,000 increase in private payrolls, according to the 43 economists who forecast that figure, meaning public payrolls could show a decline of about 14,000 jobs.
Not all local governments are seeing a turnaround, and further setbacks to the economy, housing-price slides or federal budget cuts to schools and other local aid could bring renewed pressure. Right now, Detroit, Providence, Rhode Island, and Stockton, California, are among cities struggling to avert bankruptcy after being pushed to the breaking point.
In Baltimore, property taxes in the coming budget year will fall for the first time since the real-estate crash because of the way changing assessments are phased in, said Andrew Kleine, the city’s budget director.
Baltimore has eliminated some 1,000 jobs since 2009, largely by cutting vacant positions, with 200 workers fired. Next year, the city may cut another 230 positions, about 40 of which are filled by workers who may avoid facing firing by transferring or retiring early.
“I’m not sure that’s a dramatic change,” Kleine said. “As I see it, we’re not out of the woods by any means.”
Worst Fiscal Crisis
Other governments are steadying from the worst fiscal crisis since the Great Depression. Harold Schaitberger, general president of the International Association of Fire Fighters, said his approximately 300,000-member union has started to grow again, partly because of federal grants that have helped keep fire fighters on the job.
“We have turned the corner,” he said. “We’re starting to see the cities show some signs of economic life.”
Mesa’s revenue may rise as much as 5.5 percent in the coming budget year. The city is part of the Phoenix metropolitan area, where housing prices have dropped by more than half and the resulting recession lowered taxes tied to consumer sales.
“We didn’t know where the bottom was,” Smith said. “This year, our finances have not rebounded. They’re not anywhere close to where they were in the peak of 2006 and 2007 but the good news is they’re not headed down anymore.”
No More Cuts
New Jersey’s Camden County doesn’t plan more employment cuts after reducing its workforce by more than 30 percent to 1,481, said spokesman Dan Keashen. The county also is working with the state to overhaul the local police department and put more officers back on the streets of its biggest city, Camden, whose force was slashed by almost half in January 2011.
“Really the eye of the storm has passed by, hopefully,” Keashen said.
For states, the recovering economy has caused tax collections to rise faster than state officials predicted when they put together budgets last year, leaving states including Michigan and Colorado with extra money. In New Jersey, Governor Chris Christie is counting on a 7 percent jump in tax revenue next year and has called for a reduction in income taxes.
In Lansing, Michigan, 193 people packed into the Michigan Library and Historical Center last month to apply for police jobs, some after waiting years for openings, said state trooper Marco Jones, who has been on the job for 22 years and works as a recruiter. Governor Rick Snyder has proposed using part of the state’s budget surplus to add officers.
“It was tough at times knowing that we didn’t have the bodies out there,” Jones said. “But it’s getting better.”
States project deficits of $49 billion for the next fiscal year, less than half the shortfall a year earlier, according to the Center on Budget and Policy Priorities, a Washington-based research organization that advocates against policies that it says hurt the poor and middle class.
“Certainly the pace of decline is going to start slowing,” said Nicholas Johnson, an analyst who tracks states for the group. “On balance, I think we’re at or near the bottom. The question then is, are we going to get recovery? That’s even harder to predict.”
The biggest risk to the outlook for public hiring comes from federal cutbacks, primarily postal jobs, said Mike Montgomery, economist at IHS Global Insight in Lexington, Massachusetts. The U.S. Postal Service’s employment losses will be “massive” and weigh on total federal employment, he said.
The postal service predicts an annual loss of $18.2 billion by 2015 and is shutting as many as 4,800 post offices and cutting as many as 220,000 jobs.
Automatic Pentagon budget cuts could take effect next year if the congressional supercommittee fails to meet deficit- reduction goals. Congress probably won’t let the cuts kick in and will replace them with alternative spending reductions or tax increases, said Gregory Daco, another IHS Global Insight economist.
Even as public-sector jobs stabilize, Montgomery said the move to expand hiring will be slow. “It will be a year of fewer pink slips,” he said. “Most places seem to be near the bottom of being desperate,” though “very few” governments will raise taxes to add jobs.