When States and Towns Go Broke

Localities are forced to deal with irresponsible spending at all levels.

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Federal deficits are often no more than political talking points: Rarely does federal spending have a direct impact on the average American's everyday life.

Cuts in state and local spending, however, have an immediate impact on everyday life. These cuts touch all aspects of American culture, from law enforcement to education. According to Federal Reserve data, state revenues declined $50 billion in 2008 and 2009, during the depths of the Great Recession. According to experts, it will be years until states have recovered enough to restore services to pre-recession levels.

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"The bottom line is we are now seeing a much more focused hit on services," says Robert Ward, deputy director and director of fiscal studies at the Nelson A. Rockefeller Institute of Government in New York. "We can expect that to continue likely for another year or two."

The last line. According to Ward, services like police patrols, trash collection, and community upkeep have taken such a severe hit because the buck can only be passed so far. The federal government can shift difficult spending choices to state governments, which can then shift the burden to local governments. Local governments are left with no choice but to cut services.

"What had been very bad state budget problems are now big challenges for local governments. Services will be hit much more directly when governors and legislators are balancing their budget," says Ward. "A great part of what they do is reduce money given to local governments, which can often absorb some of the impact of the state budget cuts."

"When a city or a school district has to cut its budget, it is not passing it along to another entity," Ward says. "It's reducing services or compensation to employees."

These reductions are taken from services that directly affect our everyday lives. "Municipalities are reducing the number of police officers, reducing library hours, and reducing staffing at municipal parks," Ward says.

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The problems are especially acute at the kindergarten through 12th grade level, according to Ward, and have a direct impact on the quality of the learning experience. "School districts are reducing the number of teachers and other positions. We can expect class sizes, on average, to increase. School districts are eliminating academic and other programs. In some cases, eliminating transportation services," he says.

Public institutions of higher learning have also been forced to make difficult cuts. For instance, California cut $650 million in spending on the state's public college and university systems. This cut—which represents 20 percent of annual higher education spending—led to tuition increases, the closure of academic programs, and a drain of talented professors away from the state.

Revenue is key. The reason for these drastic cuts is simple: Decreased spending during the Great Recession led to a loss of tax revenue throughout the country. According to a report from the Rockefeller Institute of Government, tax revenue in the United States was down 3.5 percent from prerecession peaks.

But according to Ward, not all areas of the country equally felt the impact. A number of factors, from the quality of the housing market to the strength of the job market, affect tax revenues. In other words, if the economy in an area was strong, the cuts to local services were not severe.

But in areas where the economy was stagnant, cuts have been especially harsh. "Michigan has been hit very badly for a decade now," Ward says. "They were suffering before the Great Recession hit because of the big decline in automakers' fortunes. Detroit is still struggling with chronic budget problems."

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Poor planning also to blame. According to the National Conference of State Legislatures, 49 states must balance their budgets each year (Vermont is the exception.) However, Tracy Gordon, a fellow in economic studies at the Brookings Institute, says many states have legal loopholes to get around this requirement. Many of these loopholes place additional burdens on local governments.