Financial District: State and Local Coffers Taking Major Hits

Slumping tax receipts threaten existing programs and future plans.

Scary state tax collection shortfalls may influence the creation some of the machinery of any new reauthorization bill. States facing almost unprecedented income shortages are getting worried that they may be unable to meet matching requirements when looking for federal dollars.

The possibility of an ARRA-style waiver of the matching requirement, or at least some tweaking to provide short-term flexibility, is likely to come up for serious discussion in both state capitals and Washington.

State tax collections for the second quarter of 2009 dropped 16.6 percent, marking the second consecutive quarter in which revenues fell more sharply over the same period of the previous year than during any previous time on record according to the latest quarterly report on state revenue collections issued by the Rockefeller Institute of Government.

All but one state (Vermont) saw total revenue fall. Thirty-six states reported double-digit decreases. Both those numbers were up from the first quarter of this year.

And, according to early signs, more troubling news is likely for the third quarter. What’s more, some predictions suggest it will be 2014 or 2015 before state revenues return to pre-recession levels.

A steeper, slower climb out

What this means of course is that any economic recovery will take its time getting states back to where they were, which in turn means many, perhaps most, states will struggle to come up with matching funds to make full use of federal transportation dollars. With state and local dollars accounting for half, or more, of the total amount spent on roads and bridges – and local revenues as hard hit as state income – future road and bridge construction may face a prolonged, slow climb back to our most recent idea of normalcy.

It is also leading states to consider becoming more innovation in their relationship with Washington, at least in the short term, as a reauthorization bill hovers on the brink of delay after delay, according to one Washington association executive who says a ARRA-style waiving or reworking of matching requirements is one idea that will almost certainly be considered by states lobbying the bill’s writers.

Another question this raises is just how much money will be needed in a reauthorization bill, according to sources in Washington. The House Transportation and Infrastructure Committee’s chairman Jim Oberstar wants a $500 billion bill (75 percent for highways) but if states and local governments have nothing in the cupboard raw Washington dollars may have to be increased.

These numbers are appearing as the Federal Reserve reports the national economy is showing “modest improvements” in its latest Beige Book, an eight times year review from businesses across America. The Fed said gathered information “indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels.” But the Book’s hesitant optimism may reflect a limited relief.

“Many econonists believe that the national recession has ended and that a tepid recovery is now underway,” wrote the authors of the Rockefeller report, the Institute’s senior policy analyst Lucy Dadayan and senior fellow Donald J. Boyd. “In fact, the state coincident economic indexes we include in this report show that 41 states had declining economies in August (compared with three months earlier) — an improvement from the 48 states that were declining in July. Unfortunately for states, an emerging economic recovery does not spell instant budget relief.

“As we have noted previously,” wrote the authors, “some elements of the economy that are very important to state finances — particularly employment and wages — are likely to recover more slowly than gross domestic product. In addition, state tax revenue, when it does begin to recover, will be below its earlier peak for at least several years and will not be sufficient to support spending commitments that are now in place. Despite the recovery, most states will face budget gaps this fiscal year and next, and probably for at least one to two additional years.”

Highway and bridge projects states and local authorities had expected to work on in the near future will inevitably come under scrutiny as states have to back away from commitment, said the Washington executive.

Worst tax collection drop since the ‘60s

The Rockefeller Institute has compiled historical data from the Census Bureau website going back to 1962. The finding: both nominal and inflation adjusted figures indicate that the second quarter of 2009 marked the largest decline in state tax collections at least since 1963. The same is true for combined state and local tax collections.

For the year ending in June 2009, the period corresponding to most states’ fiscal years, total state tax collections declined by $63 billion or 8.2 percent from the previous year, according to the Institute report. That loss is also a record, and is roughly twice the amount states gained during the year in fiscal relief from the federal stimulus package.

Preliminary figures for July and August for 36 early-reporting states show continued deterioration, with overall tax collections dropping 8 percent. Early indications of September income tax payments provide further evidence of more troubling news for states during the third quarter of 2009. Local tax revenue declined by 2.8 percent in nominal terms and 4.2 percent in real terms, marking the first such decline since 2003.

Tax collections for two major sources of revenue — sales taxes and personal income taxes — declined for the third consecutive quarter. Income tax was down by 27.5 percent, while sales tax was down by 9.5 percent.

Scott Pattison, executive director of the National Association of State Budget Officers is on record as say the states’ revenue situation is “close to unprecedented” and calling the circumstances “crazy” and “unbelievable.”

Even many of the states that lowered their expectations and set modest goals for their 2010 fiscal year tax income have fallen short of their target numbers.

According to the report, budget gaps have opened in at least 18 states since FY 2010 began. Most states have taken a variety of measures to balance their budgets, including across-the-board budget cuts, tax increases, tapping rainy day funds, and agency consolidations. The continued weakening of state tax revenues in the second half of 2009 will force states to take more drastic measures. v

How States are Coping

Back in the summer the National Governors Association Center for Best Practices (NGA Center) released a report (How States and Territories Fund Transportation: An Overview of Traditional and Nontraditional Strategies) which looked at ways states under financial pressure could get the biggest bang for the bucks they had.

Among the new or innovative transportation funding and financing approaches being used in one or more states are:

Grant Anticipation Revenue Vehicles (GARVEE bonds) —

financing instruments issued by a state whose principal and interest are repaid primarily by future federal-aid funds;

Private Activity Bonds (PABs) — financing instruments authorized for highway and intermodal transfer stations;

ARRA Bonds — two new types of transportation bonds, Build

America Bonds (BABs) and Recovery Zone Bonds (RZBs), that are provided for by the American Recovery and Reinvestment Act of 2009;

Federal credit assistance — direct loans, loan guarantees or lines of credit for transportation infrastructure projects provided through the Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program;

State Infrastructure Banks (SIBs) — revolving loan funds to finance highway and transit projects;

Congestion or cordon pricing — fees charged to motorists for road use during times of peak demand or for entry into a congested area during some portion of the day, respectively;

Public-private partnerships (PPPs) — contractual agreements between a public agency and a private sector entity to collaborate on a transportation project;

Vehicle miles traveled (VMT) fees — fees charged directly to drivers for each mile traveled, in replacement of a traditional motor fuel tax; and

Other sources such as impact fees, container fees and traffic camera fees.