State stimulus funds help to reverse GDP downward trend

Tax collections for states are down 8 percent but, thanks to the stimulus package, most of the lost revenue has been replaced by federal stimulus money. In fact, these stimulus funds have helped to reverse six months of spending declines by the states, according to a report from the Bureau of Economic Analysis.

State and local government expenditures were up 4.8 percent. That helped to minimize the decline in the GDP to just 1 percent in the past quarter. A huge improvement over the 6.4 percent drop in the first quarter.

State and local governments added 12,000 workers in the second quarter, while the private sector cut 1.3 million jobs -- a 1.2 percent reduction -- according to the Bureau of Labor Statistics. Compensation for state and local workers was up 4 percent, while private workers' pay increased just 0.8 percent. Before the stimulus package there were dire reports of significant state and local government job cuts because tax collections had dropped. Unlike the federal government most states must pass a balanced budget.

Most of the state spending in the second quarter was for buildings, highways and other capital projects, according to a study at the Rockefeller Institute of Government. Other state and local spending was flat after adjusting for inflation. Basically the stimulus funds allowed states to avoid significant budget cuts rather than increase spending.

Yet some states did increase spending. At the governor's meeting last month, Republican governor Haley Barbour of Mississippi said his state has its largest-ever budget because of the federal funds.

Most of the stimulus money runs out by December 2012 and the governors agreed there was no need for more money. Democratic Governor Bill Richardson believes it will take two years for the states to see the full impact of the federal spending.

I served on a budgeting committee for the county in which I live in Florida. My local county planned to cut its spending by $15 to $30 million because of the loss in property tax revenues. The true impact of cuts in Florida probably won't be felt until later in this year as these new, leaner budgets go into effect. This study from the Bureau of Economic Analysis may have been done too early to see the full impact of the loss in property revenues for most cities. In Florida we are seeing job cuts as local governments try to manage with less.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

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