In Part III of ‘Overcoming Economic Downturns and Fiscal Distress’, James Spiotto Discusses How We Can Solve Financial Distress with Economic Development and Stimulus from Needed Infrastructure Improvements
MuniNet Guide’s series on Overcoming Economic Downturns and Fiscal Distress last discussed the specific remedies available to Illinois and its municipalities in detail, particularly Local Government Protection Authorities. Additionally, Part II looked at the specific intervention provisions available in all applicable states, and provided a detailed look at municipal insolvency provisions, including Chapter 9 Bankruptcy authorizations, debt limitations, municipal restructuring mechanisms, and more. In Part III, James Spiotto discusses the more general principles of economic development, fiscal stimulus, and infrastructure investment, and how they ought to be applied by state and local governments.
by James Spiotto
We Cannot Avoid Economic Cycles, but a History of Financial Stability Points the Way:
In the U.S.A., financial challenges and difficulties are caused by economic cycles such as panics, recessions and depressions. Since 1793, we have had 6 economic panics, 38 recessions, and 4 depressions. There have been 11 recessions since 1949, including the Great Recession of 2007. The cycles are exacerbated unfunded pension obligations that are not sustainable and affordable, as well as the adverse effects of failing to fund essential services and needed infrastructure at an acceptable level. The healthy economy of a state or local government goes hand in hand with full funding of essential services and needed infrastructure improvements and making sure all costs, including labor and pension obligations, are sustainable and affordable.
Need to Address the Systemic Problems of the Past That Caused Financial Distress:
Between 1950 and 2010 there have been over 600 sovereign (national) debt restructurings in 95 countries. As you can note, some countries repeated the restructuring process, up to six times during that period. Countries that have suffered the need for a debt restructuring have generally repeated the process numerous times with band aids rather than a permanent fix, because they merely reduced debt without addressing the systemic problems that are the root causes of the financial distress. States and local government should always strive to address root causes of financial distress.
Balanced Budgets Require Services and Infrastructure at the Level Desired:
The state and local governments of the U.S.A. have a long history of financial credibility, having learned that quick fixes and failure to maintain governmental services and infrastructure at an acceptable and desired level result in a loss of businesses and individual taxpayers, with the accompanying fiscal distress.
The State Legislatures Have Assisted in Balancing the Budget with Needed Legislation:
State legislatures have assisted state and local governments by passing legislation that (i) limits debts and taxes, (ii) provides financial oversight and assistance to those who need it, (iii) assures and requires funding of needed services and infrastructure at the level desired, (iv) respects the principles of government financing, using statutory liens and special revenues to reduce the cost of borrowing, and (v) encourages reinvestment in state and local governments, and the creation of new, good jobs and business development.
The Need to Reinvest in State and Local Governments:
The $3.6 Trillion Price Tag and Cost of Delay. The American Society of Civil Engineers (“ASCE”), in its 2013 Report, estimates the cost to maintain infrastructure at a passable level will be $3.6 trillion by 2020 or about 4 times the annual tax revenues for all state and local governments. In 2009, ASCE’s number for the next 5 years was $2.2 trillion. Inattention has caused the number to increase by $1.4 trillion in 5 years.
Historically, State and Local Government Increased Reinvestment after Economic Downturns. Continued borrowing is required to fund needed infrastructure and stimulate the economy, as demonstrated by increased borrowing after each of the economic downturn since 1949, except the last recession (2008).
Economic Growth and Job Multiplier. Reinvestment in needed infrastructure improvements creates increased Gross Domestic Product (GDP), as studies have shown $1.00 of hard infrastructure costs adds $3.20 over 20 years to GDP growth. Further reinvestment in infrastructure translates into year-to-year growth, of number of employed workers and GDP growth, given the economic stimulus and job multiplier (every new job creates service jobs that increase productivity indirectly; this can range from 2-4 or even more new jobs depending upon the industry it is created in).
- American Society of Civil Engineers estimates that by 2020, $3.6 trillion of infrastructure improvements must be made to keep U.S. infrastructure acceptable
- For every dollar of hard cost of infrastructure improvement, $3.21 of economic activity is generated over the course of 20 years
- At least $1 trillion of the $3.6 trillion needs future financing
- For every new job created due to infrastructure improvements or economic development, there are at least 2 to 5 jobs produced indirectly in supplier industries and induced in local servicing industries
The Economic Impact of Creating or Losing Current Jobs on a State or Local Government:
Examples of Past Loss of Jobs. According to the Bureau of Labor Statistics, since 1979 the U.S.A. has lost 7,144,000 or so manufacturing jobs, from a peak in June 1979 of 19,553,000 to 12,409,000 as of June 2017, or a decrease of 37%.
A New Job begets New Jobs and Economic Stimulus and Vice Versa. There is an economic impact for each job lost as to the loss of jobs to ancillary or related businesses and suppliers (job multiplier effect in reverse) and accompanying loss of tax revenues from the cost of income earning tax payers.
The Loss of jobs Due to China. Since China entered the World Trade Organization (“WTO”) in 2001, the U.S. goods trade deficit with China has eliminated or displaced 3.2 million U.S. jobs, 2.4 million (75%) of which were in manufacturing. The jobs displaced as a share of state employment ranged from the high of 3.6% in Oregon and 3.4% in California to a low of .59% in Wyoming and .65% in North Dakota. Between 2001 and 2010, over 42,400 U.S. manufacturing factories closed, 36% of factories employing over 1,000 workers (which declined 1,479 to 947), 38% of factories employing 500 to 999 employees (3,198 to 1,972) and there were 90,000 manufacturing companies on the bubble.
The Job Multiplier in Effect. While job multipliers vary by region and type of job, generally a manufacturing job supports 4.6 additional jobs, petroleum and coal production supports 7.3 additional jobs, while textile mills support .5 additional jobs, etc.
Manufacturing Trade Deficit and Loss of Jobs. The manufacturing trade deficit was stable between 1989 and 1997 and never exceeded $131 billion annually (or about 1% of GDP). However, it peaked in 2006 at $558.4 billion (or 4.1% of GDP), an increase from the stable period of over $420 billion. The effective state and local business tax competitive index in 2013 ranged from 3% to 16.67%, with a 50 state mean of 7.9%.
The Cost of NAFTA. Some claim NAFTA has cost $181 billion in trade deficits and one million jobs.
Addressing legacy costs and unfunded pension obligations by reinvesting in state and local governments and infrastructure. While public pension reforms may be a necessary action by some state and local governments to address unaffordable and unsustainable obligations, part of the answer should be the benefits of reinvesting in the state and local governments. As noted above, economic development and infrastructure improvements create a high tide of additional revenues that can lift all boats, including legacy costs. It should not be forgotten that economic development and growth builds on itself. Creating one new job does not end with that job. One new job created by economic development efforts actually means a multiple of jobs through the job multiplier. Creating one new job means a need for additional goods and services to support that one new job, referred to as indirect jobs.
The new employee for one new job is paid and now has money to buy additional goods and services that require additional workers to supply these personal goods and services, referred to as indirect jobs. Depending on the nature of the job, the job multiplier could result in 2 to 6 or even more jobs being created. Further funding of needed infrastructure improvements adds new dollars to the GDP of the state or municipality as construction supplies, workers, and related services are purchased and stimulate the economy. Some studies claim there is more than $3.20 in economic impact over 20 years for each good hard dollar spent on infrastructure construction. The resulting economic tide from reinvesting in state and local governments through economic stimulus programs and needed improvements can reduce if not eliminate the challenges of legacy costs.
The next article in this series will discuss the need to address unfunded pension obligations, and timely and complete disclosure to the market of material events of financially distressed state and local governments.
James E. Spiotto, Co-Publisher © James E. Spiotto. All rights reserved. The views expressed herein are solely those of the author and do not reflect the position, opinion or views of Chapman and Cutler LLP or Chapman Strategic Advisors LLC.
Up next…The need to Address Legacy Costs of Unfunded Public Pensions and Need for Timely and Complete Continuing Disclosure on Material Events during Financial Distress of State and Local Government
Click here to read the introduction to this series, “How State and Local Governments Can Overcome Economic Downturns and Fiscal Distress”
Click here to read Part I: The Gathering Storm
Click here to read Part II: Alternatives Available to the State of Illinois and its Municipalities