In 2009, local governments were a considerable contributor to the US economy – expenditures totaled 8.7% of the gross domestic product, according to a report [.pdf] released today from the Congressional Budget Office. Local governments include 3,000 counties, 36,000 municipalities, 37,400 special districts, and 14,600 public school systems in the US. Since 1970, these governments have rarely decreased the size of their workforces, but there has been a decline of 241,000 employees since December 2007, when the “Great Recession” began. This decline in local government employees has been a result of less available funds for these governments.
While the sources of funds for these governments vary, they generally receive a third of their funds from their state, a quarter of their funds from property taxes, a tenth of their funds from sales tax, and the remaining third from miscellaneous sources. Though, the two largest sources of funds for local governments, state aid and property taxes, are both in a slump as a result of the recession.
Primary causes of decreased state revenue are less state income taxes, as well as less sales tax revenue, which have led to reductions in the amount that states provide to local governments. In fact, state tax revenues have declined 13% between June 2008 and June 2010. Additionally, after increasing for over 25 consecutive years, state budgets as a whole have declined 2 straight years – 3.8% in 2009 and another 8.7% in 2010, according to the Governor’s Association 2010 state fiscal survey [.pdf]. In other words, decreased state budgets have led to decreased local budgets – the trickle-down effect.
The primary cause of lower revenue from property taxes has been a result of decreases in home values. Home values have declined for 4 straight years, according to Zillow Real Estate. In 2006, the median US home price was $238,000, whereas the current median home price is $178,000. Further, the two most recent Census Bureau reports on home values have both featured further declines in home prices. As a result, property tax revenues will likely continue to fall.
Lastly, in addition to reducing aid to local governments, many states have also reduced the amount of funds available to K-12 education. More specifically, 40 states reduced spending in K-12 programs in 2010. Even though education is the greatest expenditure for state governments, the widespread reduction in this category indicates how frugal state and local governments have had to become.