The outlook for public finances for 2021 in 10 themes


In my last column closing 2020, I identified public finance lessons from a year that “challenged and stressed our public finance systems in a way that has not been experienced since the Great Depression.” Now, as a new year begins to unfold amid the continuing grip of the pandemic, it’s time to look forward to what lies ahead for public and local finance leaders. I’m not claiming a crystal ball here, just a crow’s nest view of upcoming issues, concerns, and likely trends. Here are 10:

Intergovernmental pandemic assistance will be back on the table, but don’t expect an avalanche of cash. It’s a safe bet that the House and the White House will attempt to secure more COVID-19 stimulus funds for states and communities. The big unknown is whether Republican resistance in the Senate can be overcome. If the moderates of both parties can concoct a modest compromise, the odds may improve. Look for centrist aid proposals to make up for demonstrable income deficits, reopen schools, fill public safety vacancies, and fund public health spending over the next six months.

Even with mass vaccinations, the fiscal brake will be real in 2021. National and local revenues are expected to recover by August, but the public wage bill will lag behind this year. While the US economy is expected to grow by this summer, layoffs in the public sector and the hiring freeze will remain the weak point in national GDP. Running out of funds on rainy days will be a problem for many public budgets, making the months to come the worst for some. Nonetheless, in some states, foamy tax receipts on capital gains from the stock market offset losses due to pandemic unemployment and business closures. Households will help by spending stimulus cash.

Small business bankruptcies will continue to reshape Main Street. Even with two rounds of federal aid, a few hundred thousand small businesses have already closed their doors forever in this pandemic, and about a thousand more are closing every day. Eventually, however, many will be replaced by new startups and takeovers by competitors. Brick-and-mortar retail stores and malls will continue to suffer for now, but shoppers will return this summer once vaccinations become widespread. Bankrupt bars and restaurants will find new owners, because nature hates emptiness. Property taxes will not be affected as much as previously feared, but vacancies, rent cuts and defaults in some commercial buildings, offices and apartments will spark a wave of appraisal appeals. land that will last all year.

More and more businesses (and their well-paid executives) will migrate to low-tax, low-cost states. The exodus from high-tax states will continue, and it’s a race to the bottom with incentives for “beggar-thy-neighbor” economic development. Some of this is structurally inevitable in a federal system and a geographically diverse economy, but “giveaways to greedy capitalists” will make headlines. For local officials who find it difficult to resist the temptation to unlock incentives, the advice of professional associations is worth considering.

Public workers will return to their offices, but not full-time for many. As in the private sector, public sector employers will reorganize their workforce to allow large numbers of office workers to continue working from home, at least a few days a week. Ultimately, this global trend will reduce office space needs and costs, but it will take cash to pay for renovations. Afterwards, public agencies should find ways to redeploy the unused space, perhaps for local low-rent startup incubators. In some cities, the value of office buildings will weigh slightly on the tax roll. The suburbs win, the city centers lose.

Medicaid reform can be a blow to states. States now spend 15% of their revenues on Medicaid. Health care reform should ultimately widen this system’s safety net for low-income Americans, which would crush state budgets unless Congress changes the formula. The silver lining here is that by reducing or eliminating the state share of Medicaid costs, Congress and the new administration can federalize the revenue redistribution function of Medicaid grants (arguably where it belongs anyway. ). This will free up to $ 200 billion from current state costs – more than enough to fund two years of tuition-free public education beyond high school nationwide. Two birds with one stone, if a Biden administration can muster the votes.

Medicare for All is DOA, but “Medicare-at-Cost” is possible. A first step would be to open up the Medicare system to those aged 60 to 64 who participate in it, with premiums based on actuarial calculations to cover the costs of the cohort group. This variety of “public options” will take at least a year to implement and can be followed by opening up the Medicare system at cost to lower and lower age groups. For public employers, reducing the medical costs of retirees, especially for public security personnel who retire early, could be important. Transferring all public workers aged 60 and over to Medicare-at-Cost would reduce the bills even further. Bonus: All of this does not cost federal taxpayers anything.

Don’t expect any progress on pensions. The revenues are simply not there for employers to do more to address the underfunding of public pensions and other post-employment benefits, and elected officials will be reluctant to reduce benefit formulas for incumbent public employees, even prospectively. Funding for reform efforts will remain on the back burner. Unfunded debts for the entire baby boom workforce (especially public safety) must now be paid by their children’s generation; this ship has now sailed.

Low interest rates mean dark days for public cash managers. Returns on investment from dormant funds were once a touted source of income, but those days are gone. Treasury offices across the country just don’t need that many employees to invest short-term money at a tiny fraction of 1%. Private sector cash managers are waiving fees like crazy, and their businesses will remain miserable in 2021 and possibly 2022. The danger now is that some ambitious fool somewhere will take excessive investment risks. States should consider expanding their laws to allow diversified investments in taxable municipal notes, provided they are AA rated or insured.

Finally, “Infrastructure Week” may not sound like a joke. The odds are now in favor of a push by Congress to provide a billion or two billion dollars in infrastructure. GOP resistance will focus on where the money comes from and how much should be borne by local taxpayers. Although most projects are legitimate and our country is in dire need of improvement, the dysfunction of our political system is such that by the time federal money finally reaches the pockets of construction workers, industry will already be close to full employment. The irony is that unemployed restaurant and retail workers are not good candidates for construction jobs, so the end result will be higher construction costs in the housing market. To register an infrastructure bill in Congress, members will likely assign pet projects and tie environmental and social conditions: and aggressive labor quotas for women and minorities on construction sites. construction. And with much ado about public-private partnerships, “P3” is resurfacing as a buzzword.

GoverningOpinion columns reflect the opinions of their authors and not necessarily those of Governingthe editors or the management of.

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