Brookings: Topics - State and Local Finance

Building on Recent Advances in Evidence-Based Policymaking

Jeffrey B. Liebman — Wed, 17 Apr 2013 08:00:00 -0400

Abstract

The current fiscal environment makes it imperative that we produce more value with each dollar that government spends. Doing so will require better use of evidence in policymaking. The good news is that over the past decade new government strategies have begun to emerge—at the federal, state, and local levels—that simultaneously offer the potential to make better use of taxpayer dollars and speed up progress in addressing serious social problems. These strategies: subsidize learning and experimentation so that new solutions are developed, increase the amount of evidence on the effectiveness of existing and potential new programs, make greater use of evidence in budget and management decisions, make purposeful efforts to target improved outcomes for particular populations, and spur innovation and align incentives through cross-sector and community-based collaborations.

This paper describes the new strategies. It also proposes several steps to advance the use of evidence-based policy in the federal government, including giving agencies the authority to reserve a percentage of program spending to fund program evaluations and expanding the use of tiered evidence standards in grant competitions. Finally, it recommends two initiatives that would supplement the diffusion of these evidence-based practices with a more-focused approach that aims to supply solutions for specific high-priority social problems. The Ten-Year Challenge would tackle ten social problems by establishing data-driven, outcome-focused initiatives in one hundred communities. A federal Pay for Success initiative would help state and local governments establish Pay for Success projects in areas like early-childhood education where state and local activity has the potential to achieve important federal policy objectives or produce significant federal budget savings.

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Building on Recent Advances in Evidence-Based Policymaking -- Full Text

Authors

Jeffrey B. Liebman

Publication: The Hamilton Project

What the Stockton Municipal Bankruptcy Means, And Doesn't

Tracy Gordon — Tue, 02 Apr 2013 11:20:00 -0400

A few years ago, it was fashionable to compare California, Illinois, or whatever U.S. state was struggling financially to the troubled island nation of Greece. Now, with Stockton, California the largest U.S. municipality to enter bankruptcy, it may be tempting to make another Mediterranean comparison - this time to the troubled island nation of Cyprus.

In Cyprus as well as Stockton (plus San Bernardino, California and Jefferson County, Alabama), the question is: Who will be left holding the bag? A common theme is "haircuts," or possible losses for investors (bank depositors in Cyprus; bondholders in California) to spare wider pain to taxpayers, pensioners, public employees, and other local stakeholders.

One problem with haircuts is that they can impair future market access: the government in question may have to pay higher borrowing costs to regain investor confidence. A wider concern is contagion: If investors fear they won't get their money back, they might demand higher interest rates from the sector as a whole. Moody's Investors Service publicly worried about such contagion last summer, in a report critical of U.S. municipalities and what the organization viewed as changing norms toward bankruptcy.

But there are a few reasons to be skeptical about the contagion scenario applied to munis. First, although broad (worth about $3.7 trillion in 2012), the municipal bond market is not very deep. On the supply side, a few large issuers like California, New York, and Texas dominate. On the demand side, most investors are households or institutions representing households such as money market mutual funds.

Because of its traditional mom-and-pop structure, muni bonds don't transact very often. When they do, different buyers may pay different prices for the same bond, and prices can rise faster than they fall (the "rockets and feathers" phenomenon). Economists have rightly criticized these features as inefficient. However, some market participants counter that proposed cures might be worse than the disease.

A silver lining of less-than-perfect information and higher transaction costs in muni markets may be that shocks are transmitted slowly through the system. More educated institutional investors are probably able to sort good apples from bad; other investors simply "buy and hold." A recent IMF working paper confirms these predictions: after a bad credit event, investors apparently shift their money from places like California and the City of New York to safer issuers.

Rather than suffering from Stockton's misfortune, other states and municipalities will probably benefit, much like U.S. Treasuries after the 2008 financial crisis. Interestingly, the IMF authors did detect some evidence of contagion, or bad news spreading, but in an unexpected direction from munis to U.S. Treasuries. One explanation is that investors looked at a Illinois or California and worried about prospects for a federal bailout, analogous to Cyprus and the rest of the Eurozone.

Still, measured effects were small and took time to surface. The U.S. also has a long history of steadfastly refusing requests for local aid.

In any event, it will take some time to parse through yesterday's Stockton ruling. Its most significant effects may be felt within California—where many municipalities pay into the state's CalPERS pension fund. The judge ruled that CalPERS was just another creditor, but we still don't know who will be left holding the bag.

Authors

Tracy Gordon

Publication: Real Clear Markets

Image Source: © Lucy Nicholson / Reuters

Do Budget Commitments to the Old Shortchange the Young?

Gary Burtless — Tue, 26 Mar 2013 00:00:00 -0400

Federal spending on children edged down last year. As a result of the phase-out of stimulus programs as well as budget cuts imposed by the sequester, federal spending on children’s programs is expected to drop still further this year and next. Meanwhile, outlays on federal programs for the elderly continue to rise. Most of this spending consists of transfer payments under Medicare, Medicaid, and Social Security. Virtually all that spending is protected against cuts connected to the sequester.

According to recent estimates published by the Urban Institute, the average American older than 65 now receives $6.66 in federal outlays for every $1.00 received by a child under age 19. Moreover, an overwhelming share of the spending on the aged is determined by benefit formulas that boost spending per person in line with increases in the cost of living or medical prices. Because medical costs have risen without interruption in recent decades and the share of the population past age 65 is increasing steadily, child advocates fear that kids’ programs will become orphans in a storm. Government spending on children will inevitably be squeezed as more public resources are diverted to fund programs for the elderly.

This fear is not without foundation. Based on the historical record, however, it appears wildly overblown. Core programs for children – providing public schooling and health insurance – have proven to be surprisingly resilient. Despite budget pressures to fund programs for the aged and for national defense and to pay interest on the national debt, per capita government spending on public schools and child health insurance programs has continued to climb. Big public programs for the aged may appear to operate on automatic pilot and hence to be immune to budget cuts. But presidents, governors, and legislators have also displayed an enduring regard for programs that educate and protect the health of children.

For example, per pupil spending on K-12 education has increased with virtually no interruption over the past 120 years. In the three decades between 1980 and 2009 real spending per pupil increased 2.3% a year (see Chart 1). True, per pupil spending on public schools climbed more slowly in the most recent decade than it did in the previous two. It only increased 2.1% a year between 2000 and 2009. Still, this rate of increase is considerably faster than the growth in per capita personal income during the same period. Notwithstanding the impact on government budgets of two recessions and two wars, per pupil spending on K-12 education continued to rise. The end of federal stimulus payments to state and local governments combined with state and local revenue problems have undoubtedly slowed educational spending growth since 2009. Nonetheless, it is hard to see evidence in the historical record that legislators will savagely cut outlays on public schools.

Government spending on child health insurance has also climbed steeply in recent years. The Census Bureau estimates that almost 4 in 10 children under 18 now obtain health coverage under a public insurance program. This represents a major increase in public coverage compared with the situation in the late 1990s. Rising rates of public health coverage have more than offset losses in child health insurance obtained under private insurance. In fact, since 1999 children under 18 and young adults between 18 and 24 are the only age groups in the population that have seen an increase in health coverage. All of the improvement has been due to expansions in government coverage. Meanwhile, Americans older than 25 have seen health coverage rates fall (see Charts 2 through 4).

Much of the concern over the future prospects of children’s programs arises from an understandable confusion over the source of funding for these programs. Since establishing the Social Security program in the great depression, the federal government has assumed a major role in assuring Americans’ old-age income security. Because personal savings and private pensions proved inadequate to assure safe retirement incomes in the 1930s, the national government established a contributory pension system that provided predictable, but modest, public pensions. The federal government has thus assumed the leading role in collecting contributions and disbursing benefits for old-age income security.

It has not assumed a similar role in assuring public benefits for children. The primary source of income support for children is parental earnings. State and local governments continue to play the leading role in education and public health insurance, though federal aid to states and localities is increasingly important in funding state and local commitments. Whereas the federal government spends $6.66 on each aged American for every $1.00 it spends on a child, state and local governments spend $8.88 on each child under 19 for every $1.00 they spend on a person older than 65. Since the federal government spends considerably more than states, total per capita public spending on the aged is higher that per capita spending on the young.

The crucial point, however, is that state and local governments are the primary source of funds for programs that provide education and other benefits to children. It is conceivable that budget pressures arising from increased health costs and an aging population will eventually cause public spending on youngsters to fall. The historical record provides little evidence to support this view, however. Long-term spending trends, both at the federal and local levels, suggest that core programs for children receive roughly the same budget protection as programs for the aged.

Authors

Gary Burtless

Publication: Real Clear Markets

Image Source: © ERIC THAYER / Reuters

Funding Transportation Infrastructure with User Fees

Jack Basso and Tyler Duvall — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Tyler Duvall and Jack Basso suggest looking to user fees as a way to raise revenues, reduce congestion on major roadways, reduce pollution, and promote wiser infrastructure investments.

IMPACT

Deficit Reduction (10-year): $312 billion

Broader Benefits: Raises revenues, reduces congestion on major roadways, reduces pollution; promotes wiser infrastructure investments.

INTRODUCTION

Federal surface transportation programs are intended to improve the quality, utility, and productivity of the surface transportation system by enhancing the system's safety (e.g., achieving reduced vehicle crashes, including fatalities) and operating performance (e.g., reducing congestion, increasing freight throughput etc.); and by reducing the environmental impact of surface transportation. Although federal transportation spending is less than 2 percent of the overall federal budget, that spending—like spending in the rest of the budget—is currently on a collision course with reality. Unlike most federal programs, the federal surface transportation program has historically been funded by dedicated taxes on gasoline, diesel, and other transportation-related taxes. These taxes are deposited into the Federal Highway Trust Fund and then invested in roads, bridges, transit systems, and a variety of other surface transportation projects through state and local governments.

After being replenished by the general fund multiple times in recent years (adding billions to the federal deficit in the process), however, the Highway Trust Fund (the Fund) is currently projected to go negative again in 2015, with the negative balance growing rapidly each year after that (figure 9-1).

The 2012 federal surface transportation legislation Moving Ahead for Progress in the 21st Century Act (MAP-21) bought several years of solvency in the Fund, but did not address the long-term trajectory of the program. Going forward, it is undisputed in transportation policy circles that a new approach will be needed to sustainably fund surface transportation in the United States. The key questions that remain unanswered are these: How do we balance a looming near-term funding cliff with the long lead times associated with funding reforms that are more fundamental? And what role does the revenue policy choice play in improving transportation performance outcomes, particularly as it relates to congestion levels? If one accepts the premise that continued deficit spending to fund surface transportation projects is undesirable (some would argue this point), there are two distinct near-term options: (1) reduce federal spending to match revenues, or (2) adjust certain federal taxes in the near term. Given the growing costs to rehabilitate, maintain, and operate existing surface transportation, some experts express concern that state and local governments would not increase their own investments to fill the gap left by a shrinking federal program. Today, forty states rely on the federal government for more than 25 percent of their transportation funding.

Revenue options begin to expand when we look beyond the next two years, however. One approach that has been implemented relatively narrowly in the United States but that has achieved success in other countries is a direct road- pricing system where motorists pay fees directly to drive on certain roads (as opposed to paying taxes indirectly as they do today), potentially combined with some form of dedicated local taxes tied to specific transit projects. Economists from all backgrounds have strongly supported some form of direct pricing for roads, similar to the way other utilities are priced. In fact, Nobel Prize–winning economist William Vickrey proposed a specific road-pricing system to reduce congestion in Washington, DC, as far back as 1959 and in the New York City subway system in 1952. Vickrey said, “You’re not reducing traffic flow, you’re increasing it, because traffic is spread more evenly over time. . . . People see it as a tax increase, which I think is a gut reaction. When motorists’ time is considered, it’s really a savings” (quoted in Trimel 1996).

According to the U.S. Department of Transportation, an effective road-pricing system—once fully implemented— could generate between $38 billion and $55 billion annually in revenue while simultaneously reducing road congestion and reducing environmental impacts (U.S. Department of Transportation 2008a). Singapore’s broad use of fully electronic road pricing is one of the key reasons the World Bank perennially ranks it number one in the world in terms of logistics performance. With a population of more than 5 million and only 250 square miles of land, Singapore’s transportation system achieves free flow speeds on its expressways and arterials every day. Indeed, the key strength of such a solution is not only that it raises revenue to support surface transportation investments and operations, but also that it does so in a way that confers additional benefits including reduced congestion and pollution.

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Download the policy proposal

Authors

Jack Basso
Tyler Duvall

Publication: The Hamilton Project

Image Source: Ron Chapple Stock

The Benefits of a "Fix it First" Approach to America’s Ailing Infrastructure

Adam Looney — Thu, 14 Feb 2013 09:29:00 -0500

In his recent State of the Union address, President Obama proposed a “Fix-it-First” approach to investing in our nation’s ailing infrastructure. This approach recognizes the value of the well-traveled network of roads and bridges that make up our nation’s existing highway system, and prioritizes the maintenance and rehabilitation of our deteriorating system.

In “Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways," a paper commissioned by The Hamilton Project at Brookings, authors Matthew Kahn and David Levinson argue that the repair, maintenance, rehabilitation, reconstruction, and enhancement of our existing roads and bridges is the best way to maximize the benefits of infrastructure spending. When first constructed decades ago, the interstate highway system led to economic gains by connecting people and businesses. The full benefits of that system has eroded as roads and bridges have deteriorated, contributing to congestion, longer travel times, increased wear and tear on vehicles, and even accidents. A fix-it-first approach would recoup the value we’re missing from using our current system inefficiently. To read the full paper, click here.

Authors

Adam Looney

The Downside of States as Laboratories for Tax Reform

Tracy Gordon — Tue, 05 Feb 2013 10:35:00 -0500

With state finances gradually improving, some Republican governors are turning their attention to fundamental tax reform. Louisiana Governor Bobby Jindal has proposed replacing his state’s personal and corporate income taxes with higher sales taxes. Nebraska’s Dave Heineman and North Carolina’s Pat McCrory would do the same, broadening the sales tax base and perhaps including some previously tax-exempt services.

With Washington apparently stuck in gear on taxes among other issues, it may be tempting to see the states as leading a way to reform. Unfortunately, some of the proposals currently circulating—and the idea of states as laboratories for a fundamental federal tax reform—are fundamentally flawed.

First, as my Tax Policy Center colleague Ben Harris has noted, income-sales tax swaps would be regressive—or hit low income household the hardest. This is because low income households must dedicate a greater share of their income to consumption to achieve a basic standard of living and more of their consumption tends to go toward goods (which are taxed) versus services (which are typically not). These households also often benefit from income tax rebates which presumably would be wiped out along with the tax.

Another key issue is whether states would go after currently untaxed services. Most states have already picked off easy targets like tuxedo rentals and tattoo parlors. As pointed out by the Tax Foundation’s Joe Henchman, it’s a much heavier lift politically to tax professional services of lawyers, accountants, and real estate agents. Just ask lawmakers in Maryland, Michigan, and Florida who enacted new sales taxes on some services but were forced to repeal the levies in the face of industry backlash.

It is unclear whether states without an income tax would be able to raise adequate revenue to provide the services that individuals and businesses value. Proponents of tax swaps often point to modestly higher growth in states without a personal income tax. But these comparisons are misleading. States without income taxes usually have strong alternative tax bases like energy (Texas, Alaska, and Wyoming) or gambling (Nevada).

More broadly, states are not the federal government. The usual argument for a federal consumption tax—that it would spur investment by reducing future tax penalties on savings—does not apply in an open economy where people may respond to higher sales taxes by doing more shopping online or in neighboring states. The federal government can afford to worry less about tax flight. It is simply much easier to cross state rather than national borders to avoid taxes unless you're a professional athlete or, well, Gerard Depardieu. At both government levels, higher rates can also prompt flat out tax avoidance or cheating.

Proponents of sales-income tax swaps are correct in noting the income tax’s one major flaw: volatility. An overreliance on income taxes can put states on a revenue rollercoaster and make them very sensitive to economic downturns. This is a particular problem in states where income tax rates rise sharply with income or where individuals get more income from variable sources like stock options and capital gains.

However, states can address these problems by doing a better job managing their budgets. For example, they could improve their rainy day funds and park more money there when times are good. They might also reconsider rules that make it prohibitively costly to raid these funds in a bad economy.

In other words, state tax reform may be a good idea, but no tax cut in history has ever paid for itself. Switching from income to consumption taxes may sound like music to federal policymakers’ and some economists’ ears. But another equally resonant sentiment, especially among the latter group, is to upgrade fiscal infrastructure when the opportunity cost is low. Translation: fix the roof when it’s not raining.

Authors

Tracy Gordon

Publication: Real Clear Markets

Image Source: © Jessica Rinaldi / Reuters

State and Local Budgets and the Great Recession

Tracy Gordon — Mon, 31 Dec 2012 00:00:00 -0500

More than in past economic downturns, state and local governments were a prominent casualty of the recent recession. States in particular saw their revenues plunge. Although state taxes have been rebounding, local property taxes have dipped, consistent with a two- to three-year lag between home prices and property tax rolls. These reductions coincide with state cutbacks in local aid, further squeezing local budgets.

These are critical issues because states and localities perform most of the activities we commonly associate with government. They undertake most direct spending on public goods and services (including their expenditures from federal funds), and they bear primary responsibility for investments in education, social services, and infrastructure that directly affect our national economy and quality of life. States and localities are also key economic players, comprising 12 percent of Gross Domestic Product (GDP) and employing 1 out of 7 workers – more than any other industry, including health care, retail sales, and manufacturing.

This overview examines how states and localities fared in the Great Recession. After a brief primer on states and local finance, it takes on three related questions:

How much did state and local revenues decline during the downturn? State and local revenues often decline in an economic downturn, but federal grants may help to offset these losses. In particular, in this recession, the American Recovery and Reinvestment Act of 2009 (also known as ARRA or simply “the stimulus”) directed unprecedented fiscal relief to states and localities. In light of this response, we will ask whether the recent downturn was a truly “great” recession in the sense that, relative to prior downturns, it entailed a more substantial decline in total state and local government revenues.

To what extent did pressures for state and local spending escalate? A hallmark of economic downturns is that, just as revenues decline, demands for many types of spending, particularly those involving public welfare, intensify. We will thus ask whether the state and local public sector experienced a bona fide “great” recession in terms of not just revenues but also spending pressures.

How did state and local governments respond? In general, when governments face an operating deficit or a projected gap between revenues and expenditures, they can raise revenues, cut spending, or draw down budget reserves to close the gap. We will ask which of these responses were most frequently adopted.

Finally, the brief concludes by suggesting how states and localities might respond to ongoing fiscal and economic pressures, including looming federal deficit pressures and possible threats to tax provisions and spending programs benefiting state and local governments.

A Primer on State and Local Government Finance

As noted earlier, states and localities perform most of the activities we commonly associate with government. Figure 1 illustrates this point by showing spending by level of government as a share of GDP. For example, the figure shows that in 2011 federal spending represented about 26 percent of GDP, whereas states and localities represented 11 percent. It is worth noting that federal spending is higher because of the recession. Since 1960, the historical average is 21 percent of GDP for federal spending and 11 percent of GDP for state spending.

The key point, however, is that the federal government allocates 17 percent of its budget to state and local grants. States and localities then use these funds to provide health care, income support, education, and other services to their residents. If we allocate federal grants to the state and local level, where they are ultimately spent, federal spending as a share of GDP drops to 22 percent. If we further exclude national defense, federal spending drops to 18 percent of GDP, while state and local spending rises to 15 percent.

Figure 1 also shows that there are several years in which states and localities outspent the federal government by this measure. In fact, since 1960, federal spending excluding intergovernmental grants and national defense has averaged 12.9 percent of GDP, compared to state and local spending of 13.3 percent. Thus, states and localities have on average eclipsed 2 State and Local Budgets and the Great Recession the federal government when it comes to direct spending on goods and services in this country.

To support their activities, state and local governments rely on a variety of income sources. Their main source of revenue is taxes. States predominantly tax income and sales, while localities depend on property taxes. Both types of governments also levy fees and service charges and receive grants from other levels of government.

The state and local public sector’s largest expenditure items are education, public welfare, health, and hospitals. Together, these categories accounted for roughly two-thirds of all state and local government spending in fiscal year 2009-2010. As we will later see, they were also the budget categories most affected by the Great Recession.

A Sharp Decline in Revenues?

First, we turn to the question of what happened to state and local revenues in the Great Recession. As shown in figure 2, state taxes rose at the beginning of the recession, but they began falling in the fourth quarter of 2008. Sales taxes were the first to fall, but income taxes ultimately fell harder and faster. At their low point in the second quarter of calendar year 2009, state taxes were 17 percent below their level one year earlier and personal income taxes were 27 percent lower.

More recently, state tax revenues have been rebounding. Taxes rose by 3 percent in the second quarter of 2012 compared to one year earlier, making it a tenth quarter of consecutive growth after five straight quarters of decline in the recession. Nevertheless, state tax growth has been uneven across states, and recent evidence suggests that it is moderating.

To put these trends in perspective, consider total state and local “own-source receipts,” which include all income sources except federal grants (that is, taxes, service charges, and so forth). Figure 3 shows that these receipts fell by roughly $100 billion in real terms from 2007 to 2009. This drop was deeper and more sustained than in previous downturns, including a pair of back-to-back recessions in the early 1980s.

The federal government transferred unprecedented fiscal relief to states and localities during the Great Recession and its aftermath. In particular, the 2009 stimulus package appropriated $145 billion to help states fill their budget gaps. The stimulus also provided additional payments for highways and other infrastructure as well as education and programs 3 State and Local Budgets and the Great Recession oriented toward individuals affected by the recession. Still, federal funds did not offset state and local revenue losses (figure 4), and the stimulus programs have now expired.

To What Extent Have Spending Pressures Escalated?

We now consider the Great Recession and spending pressures. Figure 5 shows that caseloads for public programs indeed continued or escalated in the downturn. In particular, enrollments climbed for Medicaid, Unemployment Insurance, and higher education from 2007 to 2009. As a result of these pressures and revenue declines, large budget gaps opened in nearly every state, including a record number of states (43) that confronted shortfalls in the middle of a budget cycle, necessitating further actions beyond those already taken (see figure 6). Overall, states faced more than $500 billion in cumulative shortfalls from 2009 to 2012.

How Did States Respond?

Unlike the federal government, state and local governments are generally expected to balance their budgets. Indeed, many states are constitutionally prohibited from carrying a deficit forward into the next fiscal year. Thus, in addition to relying on enhanced federal funds, states and localities typically raise revenues, cut spending, or draw down reserves to close projected budget gaps.

Despite its severity, states relied less on revenue increases as a solution in the recent downturn. Although tax and fee increases in fiscal year 2009-2010 were the highest on record ($23.9 billion), this was in nominal terms and not as a percentage of prior year collections (figure 7). In all, 40 states enacted tax or fee hikes between fiscal years 2008-2009 and 2010-2011. The largest increases occurred in California and New York (accounting for about half of the total over this period). Some states (Ohio, Indiana, North Dakota, Missouri, Alabama, Wisconsin, Louisiana, and Michigan) also cut taxes.

Most states cut spending. Cuts fell predominantly in education, health, and social services, where states also dedicate most of their budgets. Between fiscal years 2008-09 and 2010-11, the Center on Budget and Policy Priorities reports that 34 states reduced expenditures on K-12 education, 43 cut college and university expenditures, 31 lowered health care expenditures, 29 cut services to the elderly and disabled, and 44 reduced employee compensation.

The effects of state and local spending cuts are evident in declining public sector payrolls. Overall, state payrolls declined 2.6 percent (137,000 jobs) and local payrolls 3.3 percent (437,000 jobs) between August 2008 and September 2012. Most state job losses occurred outside of education, while local job losses were spread across education and other areas. These cuts have continued more than 4 years since the start of the recession (see figure 8). It is this persistence of state and local job cuts that makes the Great Recession quite distinctive compared to past recessions. According to the Bureau of Economic Analysis, state and local governments have been exerting a net drag on national economic growth since the end of 2009.

What’s Next?

States are gradually emerging from the Great Recession as evidenced by improving tax collections. However, revenue gains have been uneven across states, and the pace of growth appears to be slowing. Moreover, given the sheer size of the state budget gaps faced during the recession, governors and legislators have been understandably reluctant to commit new revenues to ongoing spending. At the same time, local revenues are ebbing due to lagged effects of the housing bust and cutbacks in state aid.

Looking ahead, states and localities will experience ongoing fiscal pressures due to the slow economic recovery as well as federal discretionary spending cuts scheduled for next year under last year’s debt deal. Although major spending programs, such as Medicaid, are exempt from these cuts, they will likely be on the table in negotiations over any long term federal deficit reduction package. And so too will be tax provisions benefiting states and localities.

Meanwhile, states and localities will confront their own longterm fiscal challenges. The Government Accountability Office has projected that, by 2060, the gap between state and local revenues and spending will be as high as 2-4 percent of GDP, with the principal source of the gap being rising health care costs and aging populations. Other experts have calculated a more than $3 trillion state and local public pension funding shortfall.

A potential silver lining to the Great Recession and ensuing budget crises is that many state and local governments were forced to reexamine their tax systems and service priorities. Several renegotiated labor agreements and engaged citizens in productive conversations about tradeoffs. These steps may be fruitful over the long term as all levels of government are forced to show a tighter connection between revenues raised and services delivered.

Additional Resources

Gordon, Tracy. 2012. What States Can, and Can’t, Teach the Federal Government about Budgets. Washington, DC: The Brookings Institution. Available at: http://www.brookings.edu/research/papers/2012/03/states-budgetsgordon

Oliff, Phil, Chris Mai, and Vincent Palacios. 2012. States Continue to Feel Recession’s Impact. Washington, DC: Center on Budget and Policy Priorities. Available at: http://www. cbpp.org/cms/index.cfm?fa=view&id=711

Pew Center on the States. 2012. The Widening Gap Update. Washington, DC: Pew Center on the States. Available at: http://www.pewstates. org/research/reports/the-widening-gap-update- 85899398241

U.S. Bureau of the Census. Annual Survey of State and Local Government Finances. Washington, DC: 2011.

U.S. Government Accountability Office. State and Local Governments’ Fiscal Outlook. Washington DC: April 2012. Available at: http:// www.gao.gov/products/GAO-12-523SP

Authors

Tracy Gordon

Publication: The Russell Sage Foundation and The Stanford Center on Poverty and Inequality

Image Source: © Max Whittaker / Reuters

Out of the Hole and Over the Cliff? State and Local Budgets in 2012 and Beyond

Tracy Gordon — Fri, 21 Dec 2012 11:00:00 -0500

2012 was the year states and localities finally emerged from massive revenue hole created by the Great Recession… Or was it?

The latest data suggest that state tax collections are back at pre-recession levels. However, this is only in nominal terms. Adjusted for inflation, taxes are still below their 2008 peak and growth has been sporadic and uneven across states. It’s also unclear how much recent gains reflect investors cashing out early to avoid higher capital gains taxes next year if the country goes over the so-called fiscal cliff.

Consistent with stronger revenues, state general fund spending is expected to grow 2.2 percent this year. Although below historic averages, this represents a marked improvement over the Great Recession, when spending declined in real terms for two years in a row. Today, state lawmakers use words like “stable” and “improving” to describe their budgets – versus “grim,” “bleak,” and “dire,” which prevailed at the low point of 2009.

Still, all is not rosy. At the local level, cities, counties, and school districts are contending with lower property taxes and cuts to state aid. Job cuts have largely abated in state and local government, but to the extent they continue it is in local education. And, although only a handful of municipalities (including the two relatively large cities of Stockton and San Bernardino, CA) declared bankruptcy in 2012, muni bond analysts worry about shifting local norms and state limits on local taxation leading to more defaults and bankruptcies going forward.

The Great Recession also exposed long standing weaknesses in state and local public finances, including underfunded employee pensions and the proliferation of non-traditional debt. A State Budget Task Force convened by former Federal Reserve Chairman Paul Volcker and ex-New York Lieutenant Governor Richard Ravitch issued several high quality reports in 2012 on these risks. However, much more work remains to be done to make state and local finances truly accessible and transparent.

Looking ahead, perhaps the biggest vulnerability for states and localities is their exposure to federal fiscal retrenchment. States depend on federal grants for more than a third of their general revenues. Localities derive a comparable share from states, including pass throughs of federal funds.

Although Medicaid and other big ticket items are exempt from automatic federal spending cuts scheduled for 2013, states stand to lose 6.6 percent of their revenues next year if Congress does nothing. These cuts may be small overall, but they will be painful to some jurisdictions. This is especially true because affected programs (like Community Development Block Grants, and Title I education grants) provide relatively discretionary dollars with few federal strings attached.

Of even greater concern to state and local leaders is what going over the cliff would mean for their underlying economies. Making matters worse, as in the 2011 debt limit debate, a deal to avert the cliff could be worse than no deal – because Medicaid and tax provisions benefitting states and localities could be part of any federal deficit reduction “grand bargain.”

But unlike in 2011 and other federal budget negotiations, governors and mayors have had seats at the table in fiscal cliff discussions. This may just be what Washington loves to call “optics.” Still, in 2013 and beyond, governors and mayors would do well to seize the moment to redefine the federal-state-local relationship on their own terms.

A new, more robust federalism would include measuring and publicizing successes managing challenges such as aging populations and rising health care costs. Federal, state, and local governments all share the same fiscal problems. They must all be involved in crafting solutions.

Authors

Tracy Gordon

Image Source: © Larry Downing / Reuters

High-Quality Assessments Face Political Hurdles

Matthew M. Chingos — Thu, 13 Dec 2012 13:21:00 -0500

Standardized testing in the U.S. has generated considerable controversy as the uses of test results have increased in recent years—first to measure school quality and punish low-performing schools, and now as a component of teacher evaluation systems. Some tests are also high-stakes for students, with a passing score needed to progress to the next grade or to graduate from high school.

Critics of testing point to the millions of dollars paid to test-makers and ask if the money could be better spent elsewhere. In a Brown Center report released last month, I examined data on state payments to test-makers for their math and reading assessments, which totaled $669 million annually in the 45 states for which I obtained data. A rough estimate of total state spending on all assessments is $1.7 billion, a seemingly large number but a drop in the bucket in a public education system that spends over $650 billion per year.

Put another way, if states were to eliminate testing entirely, the $1.7 billion saved could only increase teacher salaries by one percent or decrease pupil-teacher ratios by 0.1 students. In the context of $13,234 in yearly per-pupil spending, the $34 per student spent by states on testing simply isn’t very much. This figure doesn’t account for spending on testing by schools and districts, but even quadrupling the number would only bring it to about 1 percent of spending.

The paltry amount spent on testing coupled with the increasingly prominent role played by testing in education policy raises the question of whether many states are not spending enough to get the high-quality tests needed to make such important judgments as which students are learning, which schools are failing, and which teachers should be rewarded for exceptional performance. The average state in our study spent $27 per student in grades 3-9 on its math and reading assessments, but Massachusetts spent more than double that ($64) on its highly regarded assessment system, the MCAS.

My report suggests strategies for states to improve the quality of their assessments without an increase in costs, such as collaborating with other states on common tests. But many states that currently spend very little on testing may need to increase their spending in order to have assessments worthy of the uses being made of their results. This pressure will be particularly acute in low-spending states that have agreed to join the consortia developing assessments for the Common Core standards, such as Alabama, Georgia, Louisiana, and Mississippi. The higher quality promised by the developers of the new assessments is likely to come at an increased cost to these states.

A modest increase in spending on testing seems like a no brainer if it can achieve a significant increase in the quality of tests used to hold students, teachers, and schools accountable. But such a move will face significant political opposition in many states. Those most concerned about the quality of standardized tests should in theory support upgrades to assessment systems aimed at improving their quality, such as movement away from the traditional multiple-choice “bubble tests.” But many testing critics instead oppose high-stakes testing in all forms, and thus will oppose any policy that increases spending on testing.

Most Americans remain broadly supportive of testing, with only nine percent of respondents in a 2011 poll expressing opposition to the requirement that all students take yearly math and reading tests (as mandated by No Child Left Behind). However, this support may decline if the results of low-quality tests are used to make important decisions for which they are ill-suited. It will take political courage in many states to make the investments in upgrades to assessments systems that will be needed if the tests are to be used in ways that are fair to students, teachers, and schools.

Authors

Matthew M. Chingos

Image Source: © Jim Young / Reuters

Super Storm Sandy Recovery: The Case For Disaster Bonds

Robert Puentes and Patrick Sabol — Mon, 10 Dec 2012 16:00:00 -0500

Super Storm Sandy wrought havoc across the East Coast, leaving behind an estimated $10 to $20 billion dollars worth of physical damage and inflicting another $30-$50 billion in economic losses. With such a huge price tag, homeowners, private companies, insurers, and governments at all levels are struggling to figure out their financial responsibility for cleaning up the mess.

One possible solution is for the federal government to authorize the release of Sandy Disaster Bonds.

Much like private activity bonds, disaster bonds are tax-exempt debt instruments that direct private sector money into communities recovering from hurricanes, floods, or other calamities. Over the last decade, Congress authorized nearly $40 billion worth of disaster bonds for 13 states through standalone disaster relief packages as well as making program allocations in larger pieces of financial legislation. Overall, disaster bonds have a proven record of success in places like Louisiana and New York City, where they stimulated large investments in damaged communities.

Establishing a program today is likely to be challenging given the need for Congressional action. Fortunately, the process is straightforward:

First, Congress must designate an area where the bonds may be used. For example, after 9/11 Congress determined that the entire area south of Canal Street in Manhattan would be eligible for a variety of special tax and bond programs. This "Liberty Zone" became the epicenter of the federal government's recovery program. Next, Congress needs to set a cap on the total value of the bonds issued. In most cases, this is determined by using an estimate of the damages divided by the population affected. In the aftermath of Hurricane Ike in 2008, this amounted to $2,000 per resident living in the disaster area resulting in over $1.8 billion of available bonds in Texas alone. Then Congress must determine what taxes they want to waive to encourage private investment. Much like tax-exempt municipal and private activity bonds, federal taxes on interest are waived for disaster bonds. After 9/11 and Hurricane Katrina, the Alternative Minimum Tax was waived as well.

The authority to issue bonds is then passed to states and/or localities, although both private firms and local governmental units are eligible for funds. The state serves as a conduit for the debt, which passes on all the tax advantages of the disaster bond to investors, while handing over all the repayment responsibility to the recipient organization. Typical bond applicants include utility companies, hospitals, real estate firms, manufacturers, and companies in the hospitality industry.

While the general mechanics of disaster bonds are relatively constant, the specific application varies.

The most recently implemented disaster bond programs were released in quick succession after the damage caused by Hurricane Ike and the storms that swept through the Midwest in the fall of 2008. Taken together, these two programs are the largest ever approved by Congress, both in their geographic scope and in their total value. Overall, tax-exempt bonds were made available in nine states with a total value of over $16 billion. After Hurricane Katrina, $15 billion worth of Gulf Opportunity Zone Private Activity Bonds supported a range of projects from $1 billion to rebuild a Marathon Oil Company refinery facility, to a $460,000 bond to finance the construction of a commercial office building issued by the Calcasieu Parish Public Trust.

Unlike GO Zone Bonds, Liberty Bonds issued after 9/11 included a more rigorous set of targeted sectors and a more complicated management structure for the $8 billion allocation. Congress evenly split the issuing authority for the bonds between the governor and the mayor. Furthermore, different pots of money were set up to encourage different types of projects, including retail, residential, and utility projects in areas directly impacted by the terrorist attack.

Questions remain about the fairness and overall execution of disaster bond programs. Criticisms include lack of transparency, limited public involvement, questionable project selections, and the burden they can place on already stressed bureaucracies.

In the wake of Super Storm Sandy, any new disaster bond program needs to avoid these shortcomings. Sandy Disaster Bonds should be targeted, to aim the funds towards the geographic areas and industries that are face the largest challenges; flexible to adapt their funding criteria to match communities evolving needs by engaging with city governments, local businesses, and non-profits; and transparent to ensure the taxpayer subsidies are appropriately allocated.

Disaster bonds are not a panacea for damaged communities. Sound governance, public involvement, long term infrastructure planning, and emergency response teams are all important to ensuring the recovery of our damaged communities. Nevertheless, innovative financing techniques, like disaster bonds, are an important part of America's policy toolkit that can help the public and private sectors share the costs and responsibilities of rebuilding.

Authors

Robert Puentes
Patrick Sabol

Publication: The Avenue, The New Republic

Image Source: MIKE SEGAR

Strength in Numbers: State Spending on K-12 Assessment Systems

Matthew M. Chingos — Thu, 29 Nov 2012 08:00:00 -0500

In the coming years, states will need to make the most significant changes to their assessment systems in a decade as they implement the Common Core State Standards, a common framework for what students are expected to know that will replace existing standards in 45 states and the District of Columbia. The Common Core effort has prompted concerns about the cost of implementing the new standards and assessments, but there is little comprehensive up-to-date information on the costs of assessment systems currently in place throughout the country.

This new report by Matthew Chingos fills this void by providing the most current, comprehensive evidence on state-level costs of assessment systems, based on new data from state contracts with testing vendors assembled by the Brown Center on Education Policy. These data cover a combined $669 million in annual spending on assessments in 45 states.

The report identifies state collaboration on assessments as a clear strategy for achieving cost savings without compromising test quality. For example, a state with 100,000 students that joins a consortium of states containing one million students is predicted to save 37 percent, or $1.4 million per year; a state of 500,000 students saves an estimated 25 percent, or $3.9 million, by joining the same consortium.

Collaborating to form assessment consortia is the strategy being pursued by nearly all of the states that have adopted the Common Core standards. But it is not yet clear how these common assessments will be sustained after federal funding for their development ends in 2014, months before the tests are fully implemented. The report identifies a lack of transparency in assessment pricing as a barrier to states making informed decisions regarding their testing systems, and recommends that consortia of states use their market power to encourage test-makers to divulge more details about their pricing models.

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Authors

Matthew M. Chingos

Image Source: © Vincent Kessler / Reuters

Strengthen Federalism: Enact Legislation Supporting Residential Property Assessed Clean Energy Financing

Devashree Saha — Tue, 13 Nov 2012 00:00:00 -0500

Congress should enact legislation that supports residential property assessed clean energy (PACE) programs in the nation’s states and metropolitan areas. Such legislation should require the Federal Housing Finance Agency (FHFA) to allow Fannie Mae and Freddie Mac to purchase residential mortgages with PACE assessments while at the same time providing responsible underwriting standards and a set of benchmarks for residential PACE assessments in order to minimize financial risks to mortgage holders.

Along these lines, congressional support of residential PACE programs would:

Send a strong signal that the U.S. remains fiercely committed to investing in smart, innovative financing structures that can catalyze the energy retrofit market

Enable states and local governments—many of which suspended their residential PACE programs in the wake of the FHFA ruling—to design and implement such programs in their communities

Save money for homeowners by reducing energy costs

Create new jobs and career opportunities in both the energy efficiency and renewable energy industries

Reduce greenhouse gas emissions and so produce significant climate benefits

Download the paper » (PDF)
Download the press release » (PDF)

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Authors

Devashree Saha

Image Source: © Joshua Lott / Reuters

Strengthen Federalism: Establish a National PPP Unit to Support Bottom-Up Infrastructure Investment

Robert Puentes — Tue, 13 Nov 2012 00:00:00 -0500

In a time of constrained public budgets, leveraging private-sector financial resources and expertise to deliver a range of infrastructure projects has growing appeal. However, these public/private partnerships (PPPs) often entail complicated contracts that differ significantly from project to project and from place to place.

To address this problem, countries, states, and provinces around the world have created specialized institutional entities—called PPP units—to fulfill different functions such as quality control, policy formulation, and technical advice. The federal government should establish a dedicated PPP unit to tackle bottlenecks in the PPP process, protect the public interest, and provide technical assistance to states and other public entities that cannot develop the internal capacity necessary to deal with the projects themselves.

Creating a federal PPP unit would:

Provide states, cities, and metropolitan actors with the support and technical assistance needed from the procurement stage through long-term management of the projects by helping public actors determine the best Value for Money investment, assess long-term economic benefits of projects, and increase capacity to deal with contract changes over the life of the PPP

Create a more attractive, open, and robust environment that encourages private investment by creating predictability in the procurement process and demonstrating that the government actors involved want to “do business”

Serve as the first step in creating an integrated national infrastructure agenda, given that PPPs are integral to the overall capital investment and infrastructure strategy of the nation. Establishing a more uniform PPP process across all 50 U.S. states necessitates creating a broad strategy for national infrastructure development in the future

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Authors

Robert Puentes

The Big Infrastructure Question Posed by Sandy

Robert Puentes — Wed, 31 Oct 2012 00:00:00 -0400

In light of this week’s storm, one big question post-Sandy is what could have been done to prevent the devastating damage to the city of New York, its infrastructure, and its economy? Monday morning quarterbacking, for sure, but it’s the question on everyone’s mind now.

And for obvious reasons, that’s tough to answer. After all, what is the proper way to prepare for a once-in-a-century event? (Whether 100-year storms now happen every year is another, but related, discussion.)

In comments after the storm, New York Gov. Cuomo described a mix of traditional fixes and engineering solutions that might include barriers in the harbor or hatches at subway and tunnel entrances. This is understandable and rational, especially given the success of the rebuilt levees in New Orleans. Couple that with the fact that even an audacious investment of several billion dollars now could prevent a disaster with a price tag of tens of billions, and walls around Manhattan don’t seem like such a bad idea.

But it is also important to point out that it’s not as if the city is inert when it comes to disaster preparedness and response. In particular, New York has a coastal storm plan that recognizes the huge coastline of the city and its susceptibility (on par with places in Florida and Gulf Coast.) Even though most of the focus is on disaster response, the city’s Natural Hazard Mitigation Plan maps out a range of existing actions and prevention measures.

Here post-Sandy, however, we see it wasn’t enough. Despite laudable efforts, the city’s mass transit system is crippled, airports are shutdown, hospitals evacuated, and the power grid is dark.

So instead of wondering what could have done differently, the question should be: What now? We've seen direct, if uneven, responses to disasters: terrorism prevention in the wake of 9/11, seismic retrofits after earthquake damages in California, New Orleans rebuilt after Katrina, and well as neutered initiatives such as the one to rebuild and rehabilitate bridges after the devastating collapse in Minneapolis in 2007.

The degree of reaction to Sandy will depend on a lot of things, not the least of which are ongoing budget challenges in New York City and state, coupled with a federal government rethinking its role in an age of fiscal constraint.

But part of the wake-up call from Sandy will be just how important the city's transportation infrastructure is to its economy--mass transit, tunnels/bridges, airports--and the impact when it’s disabled.

Authors

Robert Puentes

Publication: The Avenue, The New Republic

State and Federal Disaster Relief: Expect the Best But Prepare for the Worst?

Tracy Gordon — Tue, 30 Oct 2012 12:49:00 -0400

As Hurricane Sandy bears down on the East Coast, it seems like an opportune time to revisit federal disaster relief. Even in an election year, this may be one of those rare topics where most Americans can agree. There is a strong argument for the federal government serving as a backstop against risk, and pitching in when natural and human induced catastrophes outstrip local capacities to respond.

The current federal disaster response system dates to the mid-20th century. Before that, Congress responded to floods, earthquakes, and fires on an ad hoc basis - usually by passing specific legislation authorizing the purchase and distribution of aid. (This legislation was not always popular: President Grover Cleveland vetoed a bill providing drought assistance to Texas. Backing him was Clara Barton, founder of the Red Cross, who thought local and private actors had the situation well in hand.)

This all changed as the federal government grew and began amassing other responsibilities during the Great Depression and World War II. Congress passed the first general disaster relief act in 1947 and it created a permanent disaster relief fund in 1950. It elaborated on this basic structure throughout the 1960s and 1970s culminating with passage of the Stafford Emergency Assistance and Disaster Relief Act in 1988.

With some bells and whistles added post Hurricane Katrina, the Stafford Act remains the centerpiece of federal disaster response today. It establishes the framework we have come to know: At a governor's request, the President grants a declaration of emergency (before an event) or disaster (afterwards). The Federal Emergency Management Agency (FEMA) then quarterbacks the response, which can include assistance for infrastructure repair, temporary housing, crisis counseling, unemployment benefits, and future hazard mitigation. Other federal agencies such as the Small Business Administration (SBA), Department of Housing and Urban Development (HUD), and Department of Agriculture (USDA) may also be involved.

The Stafford Act sets out various cost shares, or floors on federal versus state and local spending, based on assistance type. For example, the federal government bears 100 percent of all eligible housing costs and at least 75 percent of other categories like debris removal. It may not surprise many people that FEMA and Congress have acted repeatedly to adjust cost shares after a crisis hits.

Politics can also enter the picture earlier. Research suggests governors are more likely to seek federal disaster declarations in presidential election years, especially when they preside over a swing state, but not when they themselves are ineligible for re-election (because of state term limits). Still, local trumps national politics: governors are no less likely to request aid when it will help the other party's presidential incumbent. This situation was vividly illustrated with Governor Lawton Chile's initial refusal, then acceptance of Hurricane Andrew assistance from then President George H.W. Bush.

Why does this all of matter? Federal disaster relief is roughly $18 billion per year, a drop in the federal budget bucket (please forgive the pun). However, it is perhaps the ultimate example of "particularistic" government spending , or spending that benefits a small area but whose costs are borne generally. When these conditions apply, incentives abound, especially in the heat of a crisis, to spend freely.

To prevent abuses, the federal government typically requires local matching funds or establishes procedural hurdles for disaster and other forms of grants in aid. It did the same thing with state fiscal relief under the 2009 stimulus package. The flip side of these mechanisms, however, is that some places will not get the aid they need, when they need it.

Perhaps the solution, in economic as in natural disasters, is to set up an early warning system. For example, some have advocated an expanded set of automatic stabilizers or federal programs that direct resources to affected states and regions immediately when local unemployment rates turn south.

The appropriate design of state countercyclical fiscal policy is surely a conversation worth having. But not today. As we in the DC area wait for our power to go out (again), I can't help but think of this 1993 quote from then Missouri Governor Mel Carnahan as Congress debated assistance for flood victims: "This is not a time for debating the fine points of long-term policy." Amen.

Authors

Tracy Gordon

Publication: Real Clear Markets

Image Source: © Michelle McLoughlin / Reuters

Charting Maine's Future: Delivering the Next Economy in Maine

Bruce Katz — Tue, 23 Oct 2012 00:00:00 -0400

Editor’s Note: During a recent speech in Maine, Bruce Katz urged state leaders to make government more efficient and to invest strategically to move toward the next economy.

Thank you, Bonnie, for that introduction and for the invitation to speak today. I also want to commend Nancy Smith and her colleagues at GrowSmart Maine for undertaking an update of our original Charting Maine’s Future report from 2006.

It is great to be back in the state of Maine to see and hear about the tremendous progress since 2006 on many of our goals and recommendation and to hear about the numerous economic success stories throughout the state. These stories illustrate the depth of commitment and breath of talent throughout the state of Maine.

As so many do, Mark Muro and I fell in love with this state in the course of researching and writing Charting Maine’s Future. I talked about Maine so much at home that my older daughter spent two summers on Outward Bound in the state and now attends the University of Maine at Orono, getting an undergraduate degree in Wildlife Ecology.

That’s impact!

Yet while there is much to highlight, we all know that the American—and Maine—economy is much different today than it was in 2006. The Great Recession was a wakeup call for the United States. It revealed the failure of the prior consumption and debt-fuelled economic growth model and the urgent need to shift to an economy that is more innovative, productive, and globally-focused. While Maine has certainly been hit hard by the downturn, it’s clear that the state has the assets to thrive in the next economy … if it is focused, disciplined, and strategic.

Today, I want to begin by first briefly revisiting and reflecting on our recommendations from 2006 and what has been accomplished to date, offer some reflections on why the economic, demographic, and fiscal dynamics post-recession reinforce the roadmap from Charting Maine’s Future, and, finally, conclude with some observations about what the state, its cities and towns, businesses, universities, associations, and citizenry should do to drive sustainable growth in Maine going forward.

In 2006, we proposed a blueprint for action to build on the distinctive competitive assets and advantages of this state.

While many reports issue a laundry list of “to-dos”, our plan proposed that this state do three essential things:

Make a few big investments in what matters—quality places and the innovative economy —and sustain those investments over time
Fund these critical investments by streamlining government and shifting more of the tax burden to tourists and people from outside the state; and
Accommodate more growth in existing towns and cities through reduction of regulations and improvement in planning.

Let us review each of these recommendations in more detail.

First, we proposed two major investments for the state, a Quality Places Fund and an Innovation Jobs Fund.

It is not surprising that we recommended you focus intently on preserving and enhancing your quality of place and community. That is your brand and calling card, but it has been threatened by chaotic, dispersed development.

The Quality Places Fund was intended to give the state the resources it needs to invest primarily in land conservation/open space preservation on the one hand and community/downtown revitalization on the other. These two priorities go hand-in-hand. The more you invest in smart development and the more you re-invest in your older towns, main streets, and downtowns, the less you have to invest in protecting rural land from suburban development.

The Innovation Jobs Fund proposed doubling the state’s annual investment in research and development, as well as investing the remaining money in Maine’s traditional and emerging clusters – boat building, precision manufacturing, organic farming, ecotourism, hunting and fishing, creative arts, information technology, biotech, green building—to grow in strength and realize their full economic potential.

Second, we recommended that these critical investments be funded by streamlining government and shifting more of the tax burden to tourists and people from outside the state.

To pay for the Quality Places Fund, we argued that the state increase the lodging tax by three percentage points to bring it more in line with other states that depend heavily on tourism and recreation. To pay for the Innovation Jobs Fund, we recommended that the state pursue a “streamline to invest” strategy to weed out inefficiencies in government and use those savings to invest in building an innovative economy.

We also proposed that Maine establish a Maine Government Efficiency Commission, modeled on the federal base closing commission, which would have the powers and analytic resources to propose specific reforms to realize substantial cost savings in state government that would then be presented to the state legislature for an up or down vote. These savings would have been used to back bonds for the Innovation Jobs Fund and adjustments to the state tax code.

Finally, we recommended the state aim to accommodate more growth in existing towns and cities through reducing regulations and improving planning. We urged the state government to undertake a concerted multi-year effort to remove the regulatory barriers that now undermine the smart, commonsense development in the state, including the establishment of uniform building codes that level the playing field between new construction and rehabilitation and model zoning ordinances that enable quality planning in town centers and downtowns rather than mandate suburban chaos.

Beyond simply changing rules, we also argued that the state must become a better partner with local governments that are trying to do the right thing. We recommended that the state give towns meaningful incentives, such as a local options sales tax, to collaborate on a regional basis, and also that the state increase its support for towns that want to develop and enforce zoning and land use ordinances that better reflect community values and citizen demand.

This ambitious agenda for growth that we outlined with GrowSmart Maine—with input from stakeholders throughout the state—offered a path forward for economic success in the state.

And progress has been made.

Voters approved a bond package that included $3.5 million of new funding for a “Communities for Maine’s Future Fund,” which matched state funds with local government and private funds to make major new investments in the state’s main streets, downtowns, and local economies.

Investments in land conservation and preserving Maine’s open space have also been made through voter-approved bonds and the private sector, and tourism promotion has increased across the state via public and private efforts despite the lack of a Quality Places Fund.

The state’s historic preservation tax credit was expanded in 2008, giving developers a financial incentive to redevelop historic buildings, generating dozens, if not hundreds, of design and construction jobs with nearly $100 million in investments.

On innovation, the more than $50 million Maine Technology Asset Fund has helped the state’s universities and non-profit research institutions improve tech transfer outcomes for things like patents, licenses, and spin-offs, and the state’s promising tech clusters have received support through the Cluster Initiative Program.

On government efficiency and taxes, there has certainly been some progress, including a decrease in the state’s top income tax rate from 8.5 percent to 7.95 percent while eliminating any income tax obligation for an estimated 70,000 lower-income residents, but no reform has yet been enacted that exports more tax burden to non-residents, despite many legislative proposals with this goal.

While these are great steps forward, we all know there is much more work that can be done to move the state forward.

The challenge of implementing the recommendations from our 2006 Charting Maine’s Future report were no doubt made more difficult by the onset of the Great Recession.

Nationally, the U.S. lost 8.8 million jobs during the downturn, and we still need to add 11.2 million jobs to fully recover all of those lost during the downturn and to keep pace with population growth.

Beyond pure job growth, we also need better jobs to grow wages and incomes for lower and middle class workers and to reverse the troubling decades-long rise in inequality. Today, nearly 100 million people—about one in three Americans—are either poor or near poor.

In Maine, the picture is not much different. During the last decade, the state’s population grew by 4 percent, from 1,277,072 in 2000 to 1,327,567 in 2010—about 50,500 people. The Great Recession, however, wiped out 29,800 jobs in Maine between 2008 and 2011, and job growth has been minimal in the recovery.

Maine’s unemployment rate—at 7.6 percent—remains better than the rate for the U.S. overall, but the state’s median household income—$45,815—is below the national level of $50,046 and the number of people in poverty grew by 16.4 percent, from 135,501 in 2000 to 157,685 in 2010.

On the positive side, the distribution of people across the state began to shift slightly back towards your cores. Between 2000 and 2010 service centers collectively grew by 2 percent … not as fast as the fastest growing suburbs, but a reversal of losses from prior decades.

The Great Recession, both nationally and in Maine, revealed the failure of the growth model of the prior economy. In the aftermath of the recession, one thing is clear: the U.S., and Maine, needs to purposefully restructure the economy from one focused inward and characterized by excessive consumption, debt, and sprawl to one globally engaged, driven by production and innovation, and smart growth development.

This means moving to a “next economy” that is fuelled by innovation, powered by low carbon, driven by exports, and rich with opportunity. Let’s unpack that a little, so we both understand the broader growth model and the special moment we find ourselves in.

The vision begins with innovation—to spur growth through the interplay of invention, commercialization, manufacturing, and skilled workers.

Over the past two decades, the discussion of innovation in the U.S. narrowed, positioning it as something only conducted in the ivory tower or among exceptional entrepreneurs like Steve Jobs.

We forgot something early generations intuitively understood: the inextricable link and virtuous cycle between innovation and manufacturing.

While only about 9 percent of all U.S. jobs are in manufacturing, about 35 percent of all engineers work in manufacturing.

Although the manufacturing sector comprises only 11 percent of GDP, manufacturers account for 68 percent of the spending on R&D that is performed by companies in the United States and are responsible for 90 percent of all patents in the United States.

Going forward, we will innovate less if we do not produce more. We must make things again.

The discussion of innovation naturally leads to the notion that the next economy should be powered by “low carbon” and advanced energy.

Everything is changing.

The energy we use, the infrastructure we build, the homes we live in and the office and retail buildings we frequent, and the products we buy are all shifting from modes that are outdated to systems that are smarter, faster, more technologically enabled, and more environmentally sound.

Our competitors—China, Germany, Brazil—have embraced the clean economy, creating markets, growing jobs and stimulating investment.

The U.S., on the other hand, treats the clean economy as a political and ideological football, undermining our potential to position the U.S. at the vanguard of the next innovation-led industrial revolution.

An economy that innovates, particularly around clean energy and products, is an economy that can take advantage of rising global demand for quality U.S. products and services.

That is more important than ever. The locus of economic power in the world is shifting.

Together, Brazil, India, and China—the BICs—accounted for about one-fifth of the global GDP in 2009, surpassing the United States for the first time. By 2015, the BIC share will grow to more than 25 percent.

The top 30 metro performers today are almost exclusively located in Asia and Latin America. The 30 worst metro performers are nearly all located in Europe, the United States and earthquake-ravaged Japan.

This is not a rocket science. The U.S. needs to reorient our economy to take advantage of this new demand. In 2010, exports made up only 13 percent of the GDP of the U.S. compared to 30 percent in China, 29 percent in Canada, and higher levels in India, Japan, and the entire EU.

Finally, the next economy should be opportunity rich, so that working families can earn wages sufficient to attain a middle class life.

Building the next economy is essential here: research shows that firms in export-intense industries, for example, pay workers more and are more likely to provide health and retirement benefits.

Yet building the next economy will require the United States to get real smart, real fast.

Over the next several decades, African Americans and Hispanics will grow from about 25 percent to nearly 40 percent of the working-age population.

Yet the U.S. and this region have sharp racial and ethnic disparities on education. Upgrading the education and skills of the next, more diverse American workforce is a competitive imperative.

This macro growth model is a sharp departure from the one that dominated American thinking pre-recession—one that extolled consumption and excessive financial risk and raised the absurd prospect that the U.S. would somehow become a post-industrial economy.

We need to change our mental map. Market dynamics are changing radically.

Labor costs are now rising in China, and concerns persist about the protection of intellectual property.

Energy can be cheaper here, and more reliable.

The tsunami in Japan, the world's main supplier of many high tech components, revealed the fragility of far flung supply chains for many U.S. companies.

And, the best news, manufacturing is coming back, fueling 38 percent of the recovery.

We must innovate again. We must make things again. We must embrace clean and green as an environmental imperative and market proposition. We must embrace the world.

Finally, quality of place knits this next economy vision together, as this type of economic restructuring has enormous implications for the built environment and the form of towns, cities, and metros. A consumption economy focuses on building homes and big box retail, in isolated zones, generally far away from denser urban cores.

An innovation economy, by contrast, craves proximity, extols integration, and champions the synergistic mash up between firms in disparate sectors, educational institutions, and the housing, retail, and amenities. These are the sorts of interactions and mutual benefits that cities, with their density and diversity, can disproportionately supply. As one industry feeds another, productivity improves, entrepreneurship is encouraged and employment and wages increase in the region.

Yet physical form is not only affected by economic imperatives. Demographics play a central role and the location and living preferences of rising demographic groups are changing radically.

Research shows that a growing segment of the population prefers communities that are walk-able and livable. Elderly individuals increasingly seek places with easy access to medical services, shopping, and other necessities of daily life. Middle-aged couples whose children have left the nest are newly receptive to urban neighborhoods, cultural amenities, and shorter commutes. Young people, in particular, are experimenting with urban lifestyles, eschewing auto-centric lifestyles of previous generations in favor of biking, public transportation, and car sharing programs in urban areas.

As you can probably tell, this next economy vision aligns well with the goals and recommendations outlined in Charting Maine’s Future.

In fact, if there is a silver lining to this difficult period for both the state of Maine and the country overall, it is that the recession and weak recovery to date have confirmed and reaffirmed the course for Maine—it must act with intentionality and purpose to become a better and stronger version of itself.

How should the state continue to recover and move forward?

First, and foremost, remember what makes you special.

The pre-Recession economy, driven by consumption and amenities, celebrated the uniform. The next economy, driven by production and innovation, rewards the distinct.

A Walmart outside Portland is the same as a Walmart outside Phoenix or Atlanta or Houston. A housing subdivision in Southern Maine looks the same as one outside Charlotte or Tampa or Richmond.

But what makes Portland and Southern Maine and all of Maine distinctive and competitive is not what drives these other places.

You have tremendous assets to build from. You have an innovative and production-oriented economy. Manufacturing accounts for about 10.6 percent of the state’s total output, about 51,000 jobs, and pays a significant wage premium—about 58 percent higher than other non-farm employers in the state.

In the Portland area, you’re specialized in leather and allied product manufacturing, transportation equipment (non-aerospace and auto), and pharmaceuticals and medicine.

The Lewiston area is also highly specialized in producing leather and allied products, as well as beverages and tobacco, and textiles.

The Bangor area is a major producer of paper, and also manufactures leather and allied products and wood products.

These industries help play a critical role in spurring new ideas and innovation that spillover into other sectors. Other innovation clusters that I mentioned earlier—such as organic farming, ecotourism, information technology, and biotechnology—build on your ample base of natural resources and reflect national and global trends in technology, consumer preferences, and the demand for quality.

Maine also has a strong base in the clean economy, with over 12,200 clean jobs in 2010. While the state ranks 44^th out of 50 states in terms of number of jobs, it ranks 24^th among the 50 states for the concentration of clean jobs in the overall economy at 2 percent (the same as the level for the U.S. as a whole). Our research shows that Maine is particularly strong in sectors like wave/ocean power, sustainable forestry products, hydropower, conservation, and pollution reduction.

The state has a great set of educational institutions—both research universities and small colleges—that will train the next generation Maine workforce, whether for advanced manufacturing, the clean economy, environmental preservation, sustainable farming, boat building, etc.

And, Maine has many historic towns and cities and a natural landscape that is second to none in the United States.

My advice: pick those few catalytic projects and interventions that will further your progress, green light and fast track them … and get stuff done.

Second, get back on track. You have many unique strengths that I just named, but they will not realize their full economic potential if they are not supported by smart, targeted policies and investments.

In recent years, important programs and initiatives have been eliminated under the current Administration, including the Quality of Place Council and the State Planning Office that were shut down earlier this year. Other programs, such as the Office of Innovation in the Department of Economic and Community Development, have not been given needed focus and attention from the current administration. Lack of support for the 2010 Maine Science and Technology Action Plan reduced the momentum that had been created over the previous decade or so.

Governor LePage’s recent veto of $20 million research and development bond that would have been administered through the Maine Technology Institute could have a major impact on the state’s innovative capacity going forward.

Further, the $2 million budget cut to Head Start earlier this year, as well as cuts to Medicaid and other health care and social service programs, reduce the state’s safety net for those most vulnerable and will be costly to Maine’s economic competitiveness in the long term.

These actions are penny wise and pound foolish.

Maine cannot cut its way to prosperity. You must continue to make smart, targeted investments in those critical areas that will drive productive, sustainable, and inclusive growth going forward.

Finally, the coming fiscal storm in Washington D.C. makes it even more important to know who you are and act with focus and discipline.

Whoever wins this election will preside over the scaling back of the federal government. Mired in debt and deficit, and riven by partisan rancor and division, our federal government is not likely to provide the leadership or investments of recent years or decades past.

So you are on your own.

There is no deus ex machina. The cavalry is not coming. To paraphrase Pogo, we have met the solution and it is us.

Conclusion

Let me conclude with these thoughts.

I fundamentally believe in this state. And I fundamentally believe in the people in this room and the places and causes you represent.

Your state has experienced tough times. And you have undergone wrenching change in your economy stretching back 50, even 75 years.

But you have good bones, strong assets, and a solid hand to play in these dynamic, disruptive times.

Play that hand well. Invest in what makes you special, invest in your places and invest in your people.

Be bold. Be focused. Be disciplined. Seize the future. Carpe diem.

Authors

Bruce Katz

Publication: GrowSmart Maine 2012 Summit

Pension Legacy Costs and Local Government Finances

Richard F. Dye and Tracy Gordon — Mon, 01 Oct 2012 00:00:00 -0400

How will local government finances be affected by the large and increasing burden to pay for previously obligated pension costs? How, in particular, will these pension legacy costs change residents' perceptions of the local property tax and their willingness to pay? As a first step in a larger Lincoln Institute of Land Policy research agenda on these questions, we ask: What is known--and just as importantly, what is not known--about the magnitude of unfunded local government pension liabilities in the United States? (see Gordon, Rose, and Fischer 2012)

It is a first principle of public finance that current services should be paid with current revenues and that debt finance should be reserved for capital projects that provide services to future taxpayers. This principle is violated when pension liabilities associated with current labor services are not funded by current purchases of financial assets and instead have to be paid for by future taxpayers.

Alas, principles of prudence in public finance are not always observed, and local governments in the United States have accumulated substantial unfunded pension liabilities in recent years. This situation breaks an important link in the relationship between taxpayers and the services they receive--the rough correspondence between the overall value of public services and the resources taken from the private sector. There is considerable debate about the strength of this correspondence and how price-like the relationship is between value paid and value received for individual taxpayers, but there can be little question that using current revenues to pay for past services weakens the link.

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Pension Legacy Costs and Local Government Finances

Authors

Richard F. Dye
Tracy Gordon

Publication: Lincoln Institute of Land Policy

State Clean Energy Finance Banks: New Investment Facilities for Clean Energy Deployment

Ken Berlin, Reed Hundt, Mark Muro and Devashree Saha — Wed, 12 Sep 2012 00:00:00 -0400

Propelled by private entrepreneurship, technology gains, and public support, clean energy and energy efficiency solutions began to proliferate in recent years. However, federal policy gridlock and state budget challenges are now jeopardizing the availability of government finance, exacerbating the serious finance challenges that impede the large-scale deployment of low-carbon energy solutions.

Fortunately a number of states are now exploring a variety of ways to leverage scarce public resources with sophisticated banking and finance mechanisms. Epitomized by Connecticut’s Clean Energy Finance and Investment Authority (CEFIA), the proposed new finance entities entail the creation by states of dedicated clean energy banks that leverage public money with private sector funds and expertise.

While these banks can take different forms based on each state’s unique circumstances, they essentially combine scarce public resources with private sector funds and then leverage those funds to invest in attractive clean energy and energy efficiency projects. A timely benefit of the low-cost financing that these banks will make available is that it will reduce clean energy projects’ dependence on expiring federal grants, tax credits, and subsidies and lower the cost of these projects enough to make them cost-competitive with conventional technologies.

Along these lines, state leaders can choose among at least three bank models. They may:

Establish, as in Connecticut, a quasi-public corporation into which are combined existing state clean energy and energy efficiency funds so as to permit private investment in the bank and enable the new entity to make loans and leverage its capital with private capital
Repurpose portions of one or more existing financing authorities from a grant to a lending model and then through a partnership agreement combine the financing authority’s funds with private funds
Adjust an existing or new infrastructure bank so as to attach a clean energy finance bank to fund energy projects to a bank lending to traditional infrastructure projects

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Authors

Ken Berlin
Reed Hundt
Mark Muro
Devashree Saha