State and Local Government Finance: The New Fiscal Ice Age

Abstract

The Great Recession that began in late 2007 had devastating consequences for the fiscal health of state and local governments, and many remain in a precarious financial position. Several cities have declared bankruptcy, and more will do so in coming years. The future, however, promises no long-term relief. Due primarily to the aging population of the United States, state and local governments are allocating large and increasing shares of their budgets to expenditures on Medicaid and on retirement benefits that they have promised to their past and current employees. As these expenditures consume more of their budgets, there is less to spend on transportation, parks and recreation, education, public safety, and all the other services that these governments provide. We are thus experiencing the onset of a New Fiscal Ice Age, a period in which a given level of tax revenue purchases a considerably lower level of current services.

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