Walking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?

Abstract

Abstract:This paper develops a new measure of state and local fiscal sustainability called the "trend gap," which is based on socioeconomic and other fundamental factors and removes the shortterm influence of the business cycle. The paper estimates the trend gap and finds that the nationwide per capita trend gap has been on a growing path over the past three decades, a different conclusion than found in previous studies. Social insurance and income maintenance programs have played a major role in the growth of the trend gap, while pension and other post-employment benefits (OPEB) plans have become increasingly important in driving it up. In addition, there are large and growing disparities in the trend gap across states.

The role of intergovernmental aid in defining fiscal sustainability at the sub-national level

“…There are two distinct tracks in the analysis of fiscal sustainability concepts. One track emphasises the fiscal health of the jurisdiction in terms of whether or not the public sector is providing the appropriate level of public services financed with the appropriate level of revenue (Chapman, 2008;Ward and Dadayan, 2009;Zhao and Coyne, 2013). These are often based on median voter theory, on revenue and expenditure simultaneity, or on the role of the conflict between mandated expenditures and revenue limits.…”

“…In a recent working paper from the Federal Reserve Bank of Boston (Zhao and Coyne, 2013), the definition of fiscal sustainability has been enriched by the introduction of a trend gap and an explicit inclusion of social insurance and income maintenance programmes (as well as the continued inclusion of other post-employment benefits and pension contributions). Since social welfare programmes often have an intergovernmental component this is the beginning of a discussion of intergovernmental effects.…”

The issue of sustainability in a highly centrally regulated fiscal model of local governments: an empirical study

“…The target of debt sustainability can generally be interpreted as the objective of asset retention, where keeping and increasing assets come into focus. Such an approach helps to understand the effects of longer-term socio-economic and other fundamental factors on sustainability (Zhao and Coyne, 2013). A great example of an extended approach is that of the National Audit Office (NAO) in the UK.…”