From a Great Society to a Resilient Society: Episode 4 – Public Finance

[0:00:00 Speaker 1] I’m joined today by economic and public finance experts Professor Jamie Gal, Birth Michael Lynn and Martin Lubie from the LBJ School to talk about the fiscal crisis impacting U. S states and local government. I wanna start with some context. In July 2020 almost 100 May Texas Mayor’s House Congress form or flexible funding to help address the shortfalls caused by the pandemic. While Texas to received $11 billion in care funding, which was distribute among state counties and cities, many mayors were saying those funds didn’t match the address. The government entities losses, anticipated revenues were a decreased economic activity. This is a repeat story for many cities across the US So, Martin, I want to start with you wonder from the current fiscal challenges that state and local governments are facing. And you can you please explain how these challenges are faced with in the context of policy description that we laid out in the

[0:00:55 Speaker 2] Sure thanks, Stephen for, uh, inviting me on. Um, you’re right. The cares Act. Um, funding was intended only pork and damp pandemic related costs so it couldn’t be used. Replace reduced revenues associated with the basically the essential halt and economic activity in the spring and then the residual drag on the economy, um, throughout the last year as a result of the pandemic, Um, in terms of dollar amounts, according to the Center on Budget and Policy Priorities, um, state budget shortfalls over the next two years, um, that, uh, 2021 in 2022 expect to be about $300 million. So that’s just at the state level. Um, and local governments in U. S territories for that same period of time are expected to have a shortfall about 175 million. Um, an inflation adjusted dollars. These air these amounts are significantly more, uh, than what we saw as a result of the financial crisis and during the great recession about 10 years ago. Um, now, on the positive side, revenues have come in somewhat better than expected. Um, at least expected back in the spring, when they were just was so much uncertainty of what the impact of your pandemic would be and just almost state and local governments. But we still are residing in this era where there’s a threat of a double dip recession um, we’re gonna have to deal with expiring federal aid associated with the Cars Act that was passed last last march. Um, now, another positive has been, uh, cities and states did build up that rainy day fund after the great recession. Eso they’ve been using these Renda cause the buttress, the current your budget. Um, but these rainy day funds won’t be available next year or they’ll be available in much smaller amounts. Um, so they’re not gonna be a policy lever that states and cities is gonna be able to rely on going forward. Um, I should also note that the impact in terms of this context that we’re talking about really is contingent, um, on different cities. So cities, um, have you know, are different fundamentally, in terms of many factors, including their tax structure, various socioeconomic demographic factors like age, income of resident population growth, unemployment levels, the types of employers in their community, eso some states and cities have done better than others. For example, of city like Boston, which relies heavily on the property tax, um, they’ve seen their revenue declined much smaller than other cities. Um, now, of course, that’s the positive and the current, um, timeframe on the downside is that, um, your property tax obviously, is, uh, the impacts of recessions on the property tax lag. Um, and that could provide could be really problematic going forward for cities like Boston. Given all the concerns about fundamental changes in the residential commercial real estate markets going forward and how the pandemic made shrink change those markets fundamentally, um, And then finally, the final contextual factor. Um, that that will raise is really stable government access to capital, which was really severely constrained in the March period of time in terms of trying to access for liquidity purposes to pay their everyday build pay for the operating fund, which often many states and cities use the municipal securities market to follow from the paid for those expenses. Uh, that market was disrupted dramatically in March, but it didnt normalize beginning in mid April and may, um, in this disruption in the market really was the impetus for the Federal Reserve implementing municipal liquidity facility, which allowed for direct short term lending the eligible stable government. Um, but that hasn’t been a really a successful program in terms of update, um, a za result of the normalization of municipal market only to governments. The state of Illinois and New York’s Metropolitan Transportation Authority ended up using the facilities. Eso the federal invention intervention as it was structured, has proven to be much help. Most governments, um, I do have a working paper. Actually, that shows that some of the other liquidity facilities that the Fed implemented in that March period of time specifically the Money market Mutual Fund liquidity facility did support the secondary market in the missile securities market, which helped normalize the primary market, Um, which is allowed for greater access to liquidity capital for stable dozens. Now, um, I guess I’ll conclude on the downside of the MLS, although it wasn’t successful, did expire in December 31st. Eso that lending backstop is no longer available to see more of the government’s, which makes their finances even more fragile, especially from the perspective of advisers.

[0:05:33 Speaker 1] Marty, That’s great. Thanks. Thanks for that context. Um, Michael, Now in your piece in the tool kit, you talked a lot about revenue sharing and sort of provided some examples about how so this flexible funding has helped paid for teachers in Manhattan and maybe even streetlights in Buffalo. Can you tell us a little bit about the history of federal revenue sharing and how you could see federal revenue sharing helping to solve some challenges that we’re facing today?

[0:05:58 Speaker 2] Yes, most major democracies have a system of what is called fiscal equalization, known in the U. S. Has revenue sharing. That means that taxes were collected in the national level on then they’re distributed to federal units. Whether they’re states is in the U. S. Or provinces in other countries based on the population rather than on the local revenue collection. So in practice, this allows the states or local units you know, there could be cities as well as states or provinces, uh, that that are more poor or working class to a benefit from higher public spending. Uh, usually fiscal equalization affect the public spending the first responders, the schools and so on. The U. S. Actually had a system of federal revenue sharing between 1972 and 1986 and it was remarkably bipartisan in its support. It was supported by President Richard Nixon by a former vice president, Hubert Humphrey. Ronald Reagan supported it. A tip o Neill. The Democrats supported it. It was very popular program, uh its popularity was broad but shallow. And that is what doomed it in the 19 eighties because there was a major push for reducing the federal deficit on when people went looking for programs to cut. Uh, everybody liked this program, but they weren’t willing to fight for it necessarily. And in addition, you had deficit hawks on the political right who were just against it from the beginning, because it was a government spending. And you had many progressives and liberals who wanted targeted federal spending to underprivileged and disadvantaged groups rather than revenue sharing. So it was sacrificed in the interest of deficit reduction by the Tax Reform Act of 1986 despite its popularity and bipartisan support.

[0:08:09 Speaker 1] So, Michael, if you’re going to revive this this idea of federal revenue sharing, what would be some of the policy recommendations that you have? Um, thio bring this policy back to life?

[0:08:19 Speaker 2] Well, I think that if you could, the legislation that created it would exempt it from a deficit reduction efforts or limit uh, the ability of Congress that is trying to cut back on the deficit Thio, kill it. Which is what happened in 1986 on. And the great advantage of it is that you would have, Ah, a system of fiscal equalization in place. Uh, that would automatically kick in during recessions and near depressions. And Professor Galbraith can speak to the countercyclical effect of fiscal equalization.

[0:09:02 Speaker 1] Jamie, do you have thoughts to add Thio Michael’s comments?

[0:09:05 Speaker 0] Sure. Well, first of ologists toe say thank you for having us here on to begin by elaborating it for a minute on Mike Observations about the 1986 Tax Reform Act. I was on Capitol Hill from the late seventies through early 1985. Waas, uh, involved peripherally in the architecture of the Tax Reform Act of 1986. And the one thing I would add to what Mike said is that there was a general move at that time to reduce the complexity of the tax code to eliminate special preferences and so forth. And so it was politically quite difficult to defend anyone. Program against the kind of general sense that the purpose of the of the of the law was to simplify the tax code, reduced tax rates and, um, and make the system more broadly fair and even across the across the spectrum. Um, a great deal was lost, however, in doing that with respect to the security of revenue streams for state local governments. And what happens in an economic downturn is that the tax revenues accruing to those governments fall because there locally raised on their based upon the economic activity in their communities. Uh, and the problem of that is that those tax revenues feed directly into economic activity. They support, uh, local civil servants. They support the teachers, they support the fire in the police. And they support ah, lot of the infrastructure and maintenance and so forth and other public services on which people in the line on those air jobs and incomes, the virtue of revenue sharing is that it provides an automatic balance on the federal government, can come in and say, Yes, you’re you’re facing a inefficiency, which is out of productive. From an economic standpoint, we will support you, uh, during this period and, uh, on when the local economy recovers and local tax revenues recover. Uh, then the need for revenue sharing diminishes, so it za part of a system of automatic stabilization, of which we have quite a number on unemployment insurance and other aspects of the Social Security system work that way. Um, they’re extremely important. But this is also important to do to maintain the quality of public services, which are essentially the you know, the first thing that, but that the citizens of the country, that’s the first interface that they have with their governing with the governing system. So as Mike said, this is a very common thing in in advanced countries around the world, something which is part of our history. But it’s also, from an economic standpoint, very useful thing. Help deal with the kind of problems that we’re having now

[0:11:58 Speaker 1] that’s terrific. I wanna now to sort of change our conversation and just pushed beyond revenue sharing for a second and talk to the future with other policies and and really start maybe at that state and local level and build to our federal policy. Marty, if you were advising state and local leaders across the country on the outlook for public finance and some of the things that they should be considering going forward, what would be your two or three recommendations. Thio those leaders.

[0:12:27 Speaker 2] Well, I mean, there’s there’s a whole litany of probably policy levers that they could draw upon in terms of federal support. Um, yeah, the way we have a stimulus bill that’s being debated down in terms off, uh, providing direct aid to state and local governments. Which, of course, the proposal, um of our peace would do automatically want to be subjected to kind of the political process. Like what we’ve seen with Kobe 19 relief bills over the last nine months. Um, but certainly, um, you know, some direct aid to state and local governments immediately is necessary. Um, these aren’t, um these aren’t really spending problems for state and local governments. This is a revenue decline. This is a revenue that year. Um, in a significant one, eso federal support is really needed immediately. Um, ride for that. Um, I also think that there’s probably some financing devices um that I know have been discussed by the Biden administration. Toe help stable government to be able to raise Resource is on their own. Um, you know, in my research, there’s different types of financing devices like build America bonds or expansion of private activity bonds or allowing government thio refinance their debt at lower rates through a reinstatement of advanced refundings. Um, some of those financing proposals which you know, are out of the mainstream. These air proposals have been in play. Maybe the event, um, CNN more expansive level in the past. Um, and they’ve been curtailed some as a result of the 2017 tax reform. Um, but certainly some of the financing opportunities there there for give stable governments and ability to raise capital much more cheaply and invest in their physical infrastructure, which, of course, is gonna have a direct impact on economic growth.

[0:14:20 Speaker 1] That’s great. So Michael and Jamie, I’d like to turn to your advice. Maybe for the by administration is, they’re sort of thinking about and grappling with these challenges. And Michael, maybe we’ll start with you advice that you would have for the bite. Administration obviously read revenue sharing is one policy prescription idea. Others that you may would have to suggest

[0:14:40 Speaker 2] Well, I think they need toe concentrate on using budget reconciliation, which enables them to prevent the Republicans from having a veto. Assuming they have 51% of the vote and reconciliation in Congress is limited to economic measures. So my advice, which is both practical and political eyes, to focus on economic issues. There are a lot of things that cannot be done through reconciliation in Congress, such as immigration reform, civil rights, various other programs. But if you have a successful first year by enacting successful economic policies, that will build public support for other policies later, and timing is always very important in public policy to have some successes early. So I would concentrate, and I would include revenue sharing in it. But there could be other economic measures, including, uh, system of paid family leave, for example, that will build up public support for non economic reforms in the future.

[0:15:49 Speaker 1] That’s terrific, Professor Galbraith. Anything to add? You get the last word on this question. Yeah,

[0:15:53 Speaker 0] I got quite a bit. And I think the Biden administration up to a very good start. The president laid out even before he took office. A very solid opening opening salvo of programs, uh, that were intended quite properly called an American rescue plan, uh, intended to deal with the with the pandemic. This is the opportunity to have a new early success because you could hardly start out in a worse position that they’re starting out in now on, uh, if they can pull off. First of all, the dealing with the public health issue and secondly, initiating least stabilizing the social and economic situation through the next year. That will already be significant success. They will then have to go to the second phase, which has already been discussed and certainly prefigured in the president’s speech, which will deal with a much larger range of structural questions, including, uh, beginning to restructure the economy. The so called build back Better but to deal with the deal with climate to deal with infrastructure, uh, and other issues that have already been mentioned. And I think revenue sharing certainly has to should be part of that.

[0:17:04 Speaker 1] Once that’s done,

[0:17:05 Speaker 0] I’m going to say there’s gonna have to be a third phase. Um, we’re gonna have to think about we have large, uh, advanced competitive sectors. You have to think about aerospace on construction of all kinds, which are not going to recover in the same back along the same pattern that they were growing on in the pre pandemic period because people’s patterns of demand is going to be dramatically different. We’re going to still have a vast employment problem because the services sector is not going to be reconstructed as it was before. And we’re going to have a very substantial financial problem because people’s debts, rents, mortgages and so forth that they’re being deferred now are going to eventually come due. And those will have to be re negotiated and settled in a way that’s fair as possible to all parties. So I agree with Mike that we have to have major successes in the first year, and we have to ward off the usual defeat that administration suffers in the midterm elections. Uh, there’s some, I think, reasonable prospect of that happening, particularly given the disarray right now of the of the other other major political party, Um, but beyond that, one just can’t stop, and one can assume that there will be, uh, after a certain point, the economy will recover on its own. There will have to be a lot of conscious effort into reconstructing an economy that’s fair for all that provides employment for all. I think a job guarantee is going to have to be a part of the of the picture on, uh, that, uh uses the nation’s resources in an effective way so as to maintain not only our position internally but our position of the world. All of that is it is really an amazing moment when these challenges, they’re going to come into focus in a way that they have. Not really. They didn’t come into focus after the great financial crisis, and they have not come in focus, maybe for 70 or 80 years. A very big moment for people who are engaged in public policies was my colleagues, uh, Marty Looby and my client.

[0:19:07 Speaker 1] Great. We’ll leave it there. Um, Professor Lubie, if others want to find more out about your work, where can they find more about what you’re working on it. They’ll be J school.

[0:19:16 Speaker 2] Well, most of my work, actually is, uh and I really do study them. This will securities market in the way state local governments raise capital in the way they manage their finances. So most of my work, um, is in more technical journals. Um, but I occasionally will, um, author op EDS That are in some of national publications and certainly some of the local publications as well on broader issues. Sustained local finance.

[0:19:40 Speaker 1] Great Professor Lynn.

[0:19:42 Speaker 2] Yes. So they can find my website at the, uh, Lyndon B. Johnson School of Public Affairs website at the University of Texas at Austin. In my latest book, Eyes, uh, the new class war saving democracy from the managerial.

[0:20:00 Speaker 0] I’m good at that. You can find my clients work on the on the bestseller list of The New York Times and in bookstores anywhere around the country. My work is my research work is substantially on the measurement of economic inequality. On I would invite listeners to check out the University of Texas Inequality Project, which can be found at u t r p dot LBJ dot utexas dot e d u On what a great deal of work done mostly, of course, by my students and not by myself has been accumulated there over the years.

[0:20:33 Speaker 1] Well, that’s terrific. Professor Lubie, Professor Lynn and Professor Galbraith. Thanks for joining us for this short conversation. We really appreciate it.

[0:20:41 Speaker 0] A pleasure.

[0:20:42 Speaker 2] Thank you.

[0:20:44 Speaker 1] Okay, guys, I promised 1. 30. It’s 1 31. Thanks. So much for one minute behind, but I was great. Appreciate you doing it for us. We’ll share it when it’s live.

[0:20:52 Speaker 2] Thanks. I appreciate it. Thank you.

[0:20:53 Speaker 1] Take care of guys. Cheers.

[0:20:55 Speaker 2] Thanks. Hey.

[0:20:57 Speaker 1] Hey. The studio people. Hey, Will, Did you catch the introduction of that? I don’t know if it was recording or not when I did the Texas, but yeah, yeah, there was. So let me just re ask that question. How’s that? Yeah, I’m gonna do the introduction. And that question, if that’s okay, if that works, okay. Yep. Perfect. I’m joined today by economic and public finance experts professors Jamie Gal, Birth, Michael Lynn and Martin Lubie to talk about the fiscal crisis impacting US states and local governments. I want to start with some context. In July 2020 nearly 100 Texas mayors asked Congress for more flexible funding to help address the shortfalls caused by the pandemic. While Texas has received $11 billion in care funding which was distributed among states and cities and counties, many mayors and county officials and state officials are saying that did not address the government’s anticipated loss in revenues. Um, to to the let me start over, guys sorry. Fuck that up. I want to start with some context. In July 2020 almost 100 Texas mayors asked Congress for more flexible funding. Help address the shortfalls caused by the pandemic. While Texas has received 11 billion funding from The Cares Act, which was distributed among state and counties and cities, many mayors said the funds didn’t address the government’s into these losses and anticipated revenues related to decreased economic activity. This is a repeat story for many cities across the U. S. So, Marty, let’s start with you. What is the current financial challenges among state local governments, and can you offer some policy suggestions or how they may address these challenges that Okay, Okay, great. Thanks. Yeah, no worries. I don’t think I don’t think I think that both of those folks who may be joining us by our joining us by the Zen caster thing again. So I think we’re okay. Cook. Tory, Was that okay? Hey, that sounded great. Um, sorry. It’s

[0:23:25 Speaker 2] I got to admit, this is No, This is no fault of

[0:23:27 Speaker 1] you, Stephen. I think

[0:23:28 Speaker 2] that Marty was a little bit long winded and could have been

[0:23:31 Speaker 1] a little bit tighter. Yeah, he was. But that’s I mean, this is public finance. It’s Marty. I mean, you’re not gonna get already tighter, right? I mean, not Teoh to be a jerk. Hey, I actually want to read that paragraph again. I felt like it’s dumped. It’s really long. Can I just I just wanna edit it really quickly. Just read it again and and use this version, if that’s okay. And Stephen,

[0:23:52 Speaker 0] that data from the

[0:23:53 Speaker 1] Texas Tribune.

[0:23:54 Speaker 0] I don’t know if you want to mention that, but

[0:23:57 Speaker 1] yeah, no worries. Um, I don’t because I don’t want to think about it. Okay. Okay. I want to start with some context. In July 2020 almost 100 Texas mayors asked Congress for more flexible funding. Help address the shortfalls caused by the pandemic. While Texas received $11 billion in care funding, many mayors across the state are saying that those funds are not enough. Thio close the anticipated revenue loss from decreased economic activity. This is a story that repeats itself for many cities and counties across the US. Marty, I want to start with you. What are the current financial challenges that many of our state local governments are facing? And how can we help those communities address those