July 30 (Bloomberg) -- U.S. states and cities increased spending in the second quarter at the fastest pace in five years, government data shows, signaling an end to the era of budget cuts that exerted a drag on the nation’s recovery from the worst financial crisis since the Great Depression.
Spending from localities rose at an annual pace of 3.1 percent in the three months through June, according to figures released today by the U.S. Commerce Department. That’s the biggest jump since the corresponding period of 2009, before municipal finances were roiled by the full brunt of the 18-month recession.
“The long drag from state and local cutbacks appears to be behind us,” Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in a telephone interview. “This is likely to be an even more important factor as economic growth ramps up over the next year.”
Rebounding home prices, a rising stock market and a growing economy are lifting tax collections by U.S. states and cities, allowing them to hire workers or boost spending on schools, public works and other programs. The gains are eliminating a drag on the recovery that lingered until last year as officials cut back to close budget shortfalls.
State tax collections have been rising since 2010 and last year recovered to their 2008 peaks, after adjusting for inflation, according to the Nelson A. Rockefeller Institute of Government in Albany, New York, which tracks state finances. Climbing real-estate values pushed up property-tax revenue by $15.4 billion, or 3.2 percent, in the year through March, according to Census Bureau figures.
The recovery has been felt broadly across the U.S. In California, which has been buoyed by a technology industry boom, lawmakers last month approved boosting the government’s budget by almost 6 percent to a record $156 billion.
Cities including San Diego, Milwaukee and Syracuse, New York, have moved to hire police officers, maintenance workers and other employees. Such local government payrolls have expanded by 76,000 through May, according to the U.S. Labor Department.
New York City’s tax collections this fiscal year will probably be $800 million higher than forecast after Wall Street reported strong first-quarter results, state Comptroller Thomas DiNapoli said yesterday.
Brooks Rainwater, the director of research for the National League of Cities in Washington, said he expects local governments’ fiscal health to improve further thanks to the real-estate market’s rebound.
“Cities are continuing to climb out of the economic downturn that has lasted so long,” he said.
Even with the jump in the second quarter, public officials whose governments were stung by the recession have been hesitant to increase spending too quickly in case another setback in the economy forces another round of budget cuts.
State budgets initially proposed by governors for the current fiscal year, which began this month in most states, proposed increasing spending by 2.9 percent, down from 5 percent in the prior period, according to the National Association of State Budget Officers. Borrowing for public-works projects has also ebbed: State and local governments have sold $158 billion of bonds this year, a drop of 16 percent from 2013, according to Bloomberg data.
Vitner, the Wells Fargo economist, said the pace in the second quarter may have been the result of surpluses that emerged as the budget year drew to a close. Still, he said, he expects state and local government spending to keep adding to economic growth as tax revenue continue to climb.
“Revenues are going to continue to improve,” he said. “States have put off a lot of projects when money was tight and we’ll start to see those more forward. We’ll see more spending on infrastructure, on schools and on hiring.”
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