State and local governments in the U.S. used to be steady employers. Mass layoffs were a rarity. Then came the 2007–09 recession, and those governments slashed half a million workers, becoming an immense drag on growth.
Now things are looking up. State and local agencies will add employees in 2013, says Mark Zandi, chief economist at Moody’s Analytics. Their payrolls in the fourth quarter will be 220,000 larger than the same period in 2012, he projects. Spending on new parks, schools, roads, and the like will rise 1.8 percent, triple the increase last year, according to projections by St. Louis-based Macroeconomic Advisers. “The bloodletting on the state and local government level has finally passed,” says Jim Diffley, chief U.S. regional economist for IHS Global Insight. “They’re no longer subtracting from growth.” The shift will help the U.S. weather the blow from federal tax increases and spending cuts, Moody’s Zandi says.
The rebound means states and municipalities are collecting more taxes. State revenues will increase 3.9 percent during the 2012-13 budget year to surpass the peak reached before the worst of the recession took hold, according to a Dec. 14 report by the National Governors Association and the National Association of State Budget Officers. California will end unpaid furlough days for its workers in June, a policy it put in place in 2009 at the height of the financial crisis.
After falling in March to its lowest level in more than five years, state and local construction rose 2.3 percent to a seasonally adjusted annual rate of $252 billion in November, figures from the U.S. Department of Commerce show. New York State may break ground this year on a $3.14 billion replacement for the 57-year-old Tappan Zee Bridge crossing the Hudson River. Oxford, Miss., is building a firehouse, expanding tennis courts, and giving its employees a 3 percent raise, says Mayor George Patterson. “We kept our heads down for a few years, but this year we feel like we’re turning the corner,” he says.
Improved finances have helped allay concerns among investors about defaults in the tax-exempt municipal bond market. The $3.7 trillion muni market returned 7.3 percent in 2012, compared with 2.2 percent for Treasuries, according to Bank of America Merrill Lynch.
States and municipalities still face longer-term challenges, including rising costs for Medicaid and underfunded pension plans. Another danger: the likelihood that the federal government will reduce its aid to states as it seeks to curb a $1 trillion-plus budget deficit. States get about one-third of their revenues from Washington. The agreement Congress worked out at New Year’s to avoid more than $600 billion in automatic spending reductions and tax increases spared states from cutbacks, at least for now. If the automatic cuts had gone through on Jan. 1, they would have cost states $7.5 billion, according to Federal Funds Information for States, a budget-tracking service. While the states escaped this time, Donald Boyd, a senior fellow at the Rockefeller Institute, says cuts in federal funding are still likely.
Cities and counties also depend on property taxes for much of their revenue, and home prices are just starting to recover, says Diffley of IHS. Prices rose 4.3 percent in October from a year earlier, the biggest 12-month advance since May 2010, according to the S&P/Case-Shiller 20-City Home Price Index.
Columbus, Ohio, hiked taxes and fired more than 100 workers when the worst of the recession hit, says Dan Williamson, a spokesman for Mayor Michael Coleman. Now, Columbus is holding employment steady. It has been working on a $342 million sewer project and plans to create more riverfront parkland. “We faced our own fiscal cliff in 2009,” Williamson says. “Now we’re in very good shape. There’s always stresses, but we feel whatever comes our way in the near term, we can handle it.”