Of budgets, tax revenue, pension reform

     It was standing room only earlier this month for Economic Perspectives on State and Local Taxes, an annual convening of legislators and think tank executives from the New England states. They might have been eager to hear some good news, amid the ongoing fiscal crisis, and indeed there was some. A recovery in sales tax and income tax revenues was positive in relation to decreases in property tax revenue. Rhode Island’s solution to its pension crisis was also noteworthy, seconded by the editors of Time magazine, who put the story on the cover (The Little State that Could). The Lincoln Institute’s Adam Langley reports on selected presentations:
     -- Ronald Fisher, Michigan State University, “State and Local Debt and Borrowing Before and During the Great Recession”: By 2007, state and municipal debt was at sustainable levels, even with some debt payments falling. Post-2008, with revenues scarce, states were offered such stimulus programs as Build America Bonds, but there weren’t many takers in New England. Now interest rates are the lowest in 40 years; interest payments on outstanding debt relative to budgets are low; and construction costs are low. Public universities have led the way in borrowing.
     -- Therese McGuire, Northwestern University, “Understanding States’ Differences in Weathering Economic Downturns”: Deficits come and go in varying ways in relation to economic downturns. In the 1960s, 70s, and the 2000s, more states had large deficits; in the 1980s and 1990s, fewer had them. One major difference is that in the 60s and 70s, deficits were caused by large capital expenditures, while in this century, more is driven by current operating expenditures.
     -- Donald Bruce, University of Tennessee, “Disappearing Sales Tax: Stability and Recession Sensitivity over Forty Years”: The sales tax accounts for about one-third of state tax revenues. More of the economy is excluded from the sales tax base, including food, clothing, and some services; while the response to the declining base has been to increase sales tax rates, a broader base performs better during recession. Base-broadening measures could include interstate purchases and e-commerce.
     -- Robert Ward, Rockefeller Institute of Government, “Income and Sales Tax Revenues Rebound, Property Tax Revenues Fall”: The picture is changing rapidly as states enjoy a bit of a recovery from the deep revenue decline. Personal income tax is up 9.2 percent and sales tax is up 7.3 percent, though property taxes have begun to decline. Real GDP growth has been slow, prompting questions about how tax revenue growth is sustainable. The challenge of balancing budgets and the big-ticket items of education and health care remains.
     Mark Zandi from Moody’s covered unemployment, foreclosures and housing inventories, small business confidence, fiscal policy, and Europe, among other elements of the current simmering economic stew; his presentation was titled “On thin ice.” But it was the unlikely topic of state pension reform that perhaps stirred the most optimisim. Dean Mead from the Government Accounting Standards Board detailed proposals for tightening standards and changes in how liabilities and expenses are calculated, followed by Richard Licht from Rhode Island on the state’s aptly named Retirement Security Act of 2011, a measured but comprehensive attempt to straighten the course on public employee pensions.
     The conference Dec. 2 at Lincoln House was co-sponsored by the New England Public Policy Center and the Federal Reserve Bank of Boston.