02.16.23

Special Briefing: State and Local Budgets in Uncertain Times

Special Briefing Logo
Date
Time

11:00AM

As governors and mayors announce their spending plans for fiscal 2024, the Volcker Alliance and Penn Institute for Urban Research invite you to join our panel of experts for an online Special Briefing on State and Local Budgets in Uncertain Times.

Our panel of experts will include Shelby Kerns, executive director, National Association for State Budget Officers; Eric Kim, senior director, Fitch Ratings; Lauren Larson, director, Colorado Governor's Office of State Planning and Budgeting; and Gabriel Petek, legislative analyst, State of California.

Moderated by William Glasgall, Volcker Alliance senior director, public finance and Penn IUR fellow, and Susan Wachter, co-director of Penn IUR, this briefing is the thirty-ninth in a series of sixty-minute online conversations featuring experts from the national research networks of the Volcker Alliance and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders.

Special Briefings are made possible by funding from The Century Foundation, the Volcker Alliance, and members of the Penn IUR Advisory Board.

Recordings of the entire Special Briefings series are available on the Volcker Alliance website: SPECIAL BRIEFING SERIES ARCHIVE.

Be sure to subscribe to the Special Briefing podcast, available on Apple PodcastsSpotifyGoogle PodcastsStitcherTuneIniHeart Radio and more.


Special Briefing Episode Summary:

State, Local Budget Officers Gird for Tough Times Ahead

By Stephen Kleege, Volcker Alliance Special Project Consultant

  • Record rainy day funds bolster confidence as recession risk rises
  • Tight labor markets, expiration of COVID relief, debt ceiling add to worries
  • Income Tax Revenue Slips in New York, California
  • California needs to close as much as $25 billion deficit
  • Colorado sends out rebates under Taxpayer's Bill of Rights

State and local budget officers are facing a raft of risks and uncertainties for fiscal 2024 and beyond from a position of unprecedented strength, according to analysts and budget experts at a Special Briefing hosted by the Volcker Alliance and the Penn Institute for Urban Research.

At the end of fiscal 2022, state rainy day funds reached a record $134.5 billion, or a median level of 11.6 percent of general fund spending, said Shelby Kerns, executive director, National Association for State Budget Officers (NASBO). She said the rainy day funds and other reserves, coupled with improved budget practices following the Great Recession of 2007-2009, will help cushion state finances against the chance of difficult times ahead.

Webinar panelists said budget officers are grappling with, the risk of recession, along with tight labor markets and inflation putting upward pressure on wages. Meanwhile, they will also have to factor in the expiration of federal COVID-19 stimulus; a changing tax base in urban office markets as more people work from home; and the possibility of a global financial crisis if Congress fails to raise the US debt ceiling.   

Moderated by William Glasgall, Volcker Alliance senior director, public finance and Penn IUR fellow, and Susan Wachter, co-director of Penn IUR, the briefing was the thirty-ninth in a series of sixty-minute online conversations featuring experts from the national research networks of the Volcker Alliance and Penn IUR, including leading academics, economists, and federal, state, and local leaders.

In addition to Kerns, panelists included Eric Kim, senior director, Fitch Ratings; Gabriel Petek, legislative analyst, State of California; and Lauren Larson, director, Colorado Governor's Office of State Planning and Budgeting.

Fitch sees a deteriorating outlook for state and local governments, Kim said, but remains comfortable about the stability of their credit. “States and local governments have the tools, including things like solid reserves and well managed liabilities, that should allow them to ride out what looks like it could be just a moderate recession,” he said.

Kim said rising sales tax receipts have contributed to a substantial revenue cushion for many states. However, he said, California and New York are reporting declines in income tax receipts, probably related to the collapse of tech sector initial public offerings and reduced bonuses on Wall Street.

“The big question, of course, is whether California and New York are exceptions or outliers, or are they the leading edge in a widespread slowdown or decline in tax revenues,” Kim said. “April collections this year, as they are every year, will be an important part of the answer for us.”

Kim said the unexpected surge in revenue during the pandemic is spurring changes in tax policy, including some that may prove costly, such as proposals in Mississippi and North Dakota to largely eliminate the personal income tax. “Enacting significant tax policy changes amid an uncertain economic environment increases the risk of unexpected consequences,” Kim said.   

Kerns said NASBO is confident in states’ ability to weather a recession because of their revenue growth, increased rainy day funds, and total balances that have tripled in size over the past two years to just under 25 percent of general fund spending. States have paid off debt, used surplus funds for capital projects, made supplemental payments to pension funds, and created savings accounts for disaster preparedness, and Medicaid and education spending, she said.

Governor Gavin Newsom’s budget proposal in California reflects an $18 billion deficit, primarily the result of a $30 billion downward revision in revenue estimates, Petek said. The governor’s proposal to balance the budget through $13.6 billion in reductions or delays to scheduled spending and $4.3 billion of cost shifts, is “generally prudent,” Petek said. The Legislative Analyst’s Office, however, estimates the deficit at $25 billion and recommends solutions that would address the deficit without using reserves.

“Our office is not saying that the state should never use reserves,” Petek said. “If after solving the level of deficit that we estimate, the problem has gotten worse or the economy has gone into recession, we would say that that is really the time to use reserves,” he said. “The reserves are really there to support core baseline spending.”

Larson said Colorado’s revenue was up 24 percent last year, exceeding the pre-pandemic trend. The state has built reserves to a record level of about 15 percent of general fund spending, she said, while sending rebate checks of $750 per individual in 2022 under the 1992 Taxpayer’s Bill of Rights Amendment. A round of $250 checks is coming in the spring, Larson said, and an additional $600 rebate is under consideration.


Shelby Kerns HeadshotShelby Kerns is the executive director for the National Association of State Budget Officers (NASBO). Prior to coming to NASBO, Kerns served as Deputy Director at the Idaho Department of Labor, having previously worked in the Idaho Division of Financial Management from 2009-2019 (the state's budget office). In her prior position as Budget Bureau Chief, she led staff in developing, presenting, and advocating for the Governor’s Executive Budget. As a past member of NASBO, Kerns served for two years on the association’s Executive Committee. 

Earlier in her career, Kerns was executive director of the Idaho Rural Partnership, program director at the Idaho Association of Realtors, and assistant executive director of the Idaho Wool Growers Association. 

Kerns received a master’s degree in business administration from Northwest Nazarene University and a bachelor’s degree in political science from the University of Idaho. 

Kerns was a Guardian ad litem for children in foster care from 2000-2020; a Family Advocates Board Member from 2016-2019; the 2015 Tribute to Women and Industry Award Recipient; and Idaho Business Review Women of the Year Recipient in 2009. 

Eric Kim Headshot

Eric Kim is a Senior Director in Fitch Ratings’ U.S. public finance department and head of the U.S. states rating team. He is based in New York and is a member of the tax-supported ratings group, focusing on state and local government credits in the U.S.

Eric joined Fitch in March 2007, and before joining the tax-supported group he also worked in Fitch’s education and non-profit institutions group. Prior to joining Fitch Eric was chief of staff for the first deputy commissioner at the New York City (NYC) Taxi and Limousine Commission. He also worked as a project manager at the Lower Manhattan Borough Commissioner’s Office in the NYC Department of Transportation (DOT). Eric began his career as a NYC Urban Fellow, providing research and analytical support in the commissioner’s office at the DOT.    

Eric was a member of the Bond Buyer’s 2016 inaugural class of Rising Stars in the municipal finance industry and has spoken at national and regional conferences on topics ranging from infrastructure investment to Medicaid. Eric earned a BA from Brown University and an MPA with a public finance specialization from the Wagner School of Public Service at New York University. Eric is also a member of the Municipal Analysts Group of New York and the National Federation of Municipal Analysts.  

Lauren Larson Headshot

Lauren Larson is Director of the Colorado Governor’s Office of State Planning and Budgeting, where she has led the state’s fiscal response to the COVID-19 pandemic and the deployment of federal stimulus. Larson is responsible for developing the Governor’s annual budget, forecasting State revenue, and conducting research and evaluation of programs. She also brings experience in state operations and agency leadership, serving as Colorado’s statewide Director of State Operations and directing a regulatory licensing agency.  

Prior to joining the State of Colorado, Lauren served as Chief of the Treasury Branch under Presidents Bush and Obama, where she managed a $50 billion budget at the White House Office of Management & Budget and ensured strong fiscal controls for the $700 billion Troubled Asset Relief Program (TARP). Lauren also worked as an economist at PricewaterhouseCoopers, later becoming a senior advisor at the U.S. Department of the Treasury, Internal Revenue Service. Early in her career, Larson managed projects at nonprofits in London and New York City. She holds degrees from Syracuse University (BA) and the University of Michigan (MPP). 

Larson is President-Elect of the National Association of State Budget Officers and a Fellow with the National Academy of Public Administration. 

Gabriel Petek Headshot

Gabriel Petek was appointed to the position of the Legislative Analyst in February 2019, as the sixth person to serve in that capacity since the office was founded in 1941. As the Legislative Analyst, Gabriel serves as the nonpartisan fiscal advisor to both houses of the California Legislature and oversees the preparation of fiscal and policy analyses of the state’s budget and programs. His office is also responsible for preparing impartial analyses of all initiatives and constitutional measures qualifying for the state’s ballot.  

Before joining the office, Gabriel worked for two decades at S&P Global Ratings. Gabriel held several positions at S&P before he was ultimately named the Managing Director and Sector Leader in the U.S. States Group of the U.S. Public Finance Division in San Francisco. Gabriel was S&P’s primary analyst for the states of California and Illinois.  

Gabriel graduated with a Master in Public Policy from Harvard University’s Kennedy School of Government, during which time he interned at the City of Boston’s Office of Management and Budget. In addition, he earned his B.A., magna cum laude, in political science from Loyola Marymount University, with a portion of his undergraduate coursework completed through his participation in the Hansard Scholars Programme at the London School of Economics and Political Science. Gabriel holds the Chartered Financial Analyst (CFA) designation and has served as an advisor to the Government Finance Officer’s Association’s Committee on Governmental Budgeting and Fiscal Policy. He currently serves on the Statewide Leadership Council of the Public Policy Institute of California.