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Local Governments and the 2007-2009 Recession

Learn about the impact of the 2007-2009 recession on local governments. Explore the economic landscape, revenue sources, and the effectiveness of government programs in mitigating the crisis. Discover strategies to prevent similar crises in the future.

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Local Governments and the 2007-2009 Recession

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  1. Local Governments and the 2007-2009 Recession Jeffrey H. Dorfman The University of Georgia January 25, 2009

  2. Outline • How We Got Here • Where Are We? • How Bad Will It Be? • Is Help Coming? • What to Do to Prevent this in the Future

  3. How We Got Here • Mortgage / Real Estate Mess • Real estate bubble started with dot-com bust. • Free markets mean booms and busts. Source: St. Louis Federal Reserve

  4. How We Got Here Source: Federal Reserve

  5. How We Got Here • State Government Role • Spending has increased a good bit last few years. • States have not been raising taxes. • States used poor economic forecasts and waited too long to see this slowdown coming (GA ex.). • States are limiting local government revenue.

  6. Where Are We? • Economy • Retail Sales • Real Estate Values • Consumer Confidence • Manufacturing • State and Muni Borrowings

  7. Where Are We - Economy • GDP dropped 0.5% in Q3. This is after it grew 2.8% in Q2, mostly due to stimulus checks. Q4 has not been released yet, but looks like it was -3 or -4%. • US unemployment up to 7.2% (from 4.8% one year ago). • Job losses 554,000 last month. • Georgia worse than U.S.

  8. Where Are We – Retail Sales • This is $4 trillion / year and very important to states since it translates directly to sales tax collections. • Georgia sales tax collections are down 0.9% so far in the first 6 months of FY09. • Distributions to local governments are down 5.7%. • Second half comparisons will be easier. Sources: US Census Bureau and GA Dept of Revenue

  9. Where Are We – Real Estate • Nationwide 20% price drop (Case-Shiller) • GA price drop is 10%. • 10-14 million homeowners now have zero or negative home equity. • Georgia has 4% of mortgages seriously delinquent. • prime = 3% • subprime = 23% (5% of market) • Up about 50% Sources: Atlanta Federal Reserve Bank and Gwinnett County Board of Commissioners

  10. Where Are We - Consumers Source: Conference Board

  11. Where Are We – Manufacturing Source: Institute for Supply Management

  12. Where Are We – State Borrowings • California is having trouble borrowing $7-20B and may not be able to pay its bills. • Hartsfield Airport may delay a new international terminal because it cannot sell bonds. • Road and school projects have been delayed in Boise, MD, AZ, TN, VA, NC, NJ.

  13. Where Are We – Muni Borrowings • Municipal bond market should be back to “normal” in a few months. • Any hints of higher income tax rates will help the muni bond market (no hint yet). • Credit should be there once markets settle down a little bit more.

  14. How Bad Will It Be? • Look at 4 sources of revenue and economic growth: • Consumer Spending • Personal Income • Corporate Profit and Investments • Government Spending

  15. How Bad Will It Be? - Consumers • Consumer spending will be slowed by • Wealth effect from stock market decline • - $100B • Wealth effect from home value decline • - $60B • Spending drop from drop in refinancings • - $200B • That means we should see 6% drop in retail sales.

  16. How Bad Will It Be? – Income • Unemployment up 3% and climbing. • Capital gains will be very low in 2008-09. • Raises and bonuses will be low. • Interest and dividends will be down. • Total effect could be 7% drop.

  17. How Bad Will It Be? - Government • Federal spending is increasing • Stimulus, plus all other programs • Probably enough to boost GDP 5% or more • State and local government spending will drop. • May be offset for federal govt, may be more. • Federal dollars for infrastructure may head to local governments soon, maybe within 6 months.

  18. How Bad Will It Be? - Summary • Estimated changes in • Sales taxes: -6% • Income taxes: -6% • Property taxes: anywhere from level to -10% • Federal dollars: ???? • Many local governments will see a 2-10% revenue drop depending on their sales/property tax mix and property values in your area.

  19. Will Stimulus/Govt Programs Work? • Bailouts slow reallocation, make recession longer. • Consumers reducing debt, more spending unlikely. • Can stabilize banks and real estate. • Local gov’t relief & infrastructure spending is good. • Should leave the remainder alone.

  20. Future Improvements for Recessions • Project revenues by category. • Sales tax, property tax, fees, etc. • Realize that different tax sources have different stability properties. • Try to pair more variable revenue sources with programs that can be cut quickly. • Set revenue target at lower limit of 95% CI.

  21. Future Improvements for Recessions • The idea for revenue forecasting would be that 95% of the time, you would end up with extra revenue.

  22. Future Improvements for Recessions • Make sure you keep a 2+ month reserve so that your bonds get the highest possible rating. • Going forward safety will be important to investors, so weigh revenue versus G.O. bonds.

  23. Conclusions • We are in a recession. • It will be a reasonably severe one with high and long lasting unemployment. • I’m glad I’m not an elected official or city/county manager right now.

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