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State, Local Finances on the Mend

A revival in tax revenues may alleviate some of the drag local governments are placing on the overall economy.

By Milton Ezrati | Updated on August 21, 2012

U.S. state and local government finances remain precarious. The degree of trouble varies from place to place, of course, but generally it will take decades for states and cities to put their finances in anything like good order. It is, in fact, a good bet that no middle-aged person today will live to see such an event. One wag has suggested the yet unborn will not live to see such a day. But if such cynicism rings of truth, the immediate outlook nonetheless points to some modest relief, at least enough to ease some of the strains under which state and local governments have labored and improve investment performance in the area as well as the overall economic picture.

The fundamental problems are well known. Profligate spending and unreasonable pension promises have placed states and cities in a financial predicament. Three years into this supposed recovery, many still struggle to balance their budgets, which, as of last measure, show a composite deficit of $130 billion. On top of this, states and cities face huge unfunded pension and healthcare liabilities. Officially, the funding shortfall amounts to some $757 billion, but this estimate assumes much higher investment returns than are generally considered likely. The huge California Public Employees’ Retirement System (Calpers), for example, currently assumes a constant 7.5% annual investment return on its assets. Last year, the system had a 1% return.

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