Ben Bernanke claimed that state and local government budgets seem to have stabilized, in response to a question by New York Rep. Gregory Meeks about why the economy lost 600,000 public sector jobs. Meeks claimed this would be the equivalent of one percent of the unemployment rate.
Later on in the hearing, Congressman Dan Kildee (D) of Michigan discussed the topic in greater depth:
“We’ve seen recently over the last couple years and even in the last few weeks a significant number of downgrades in municipal debt…which represents a symptom of a much larger problem–municipal insolvency generally. We’ve seen Vallejo, California; Harrisburg Pennsylvania; Camden New Jersey; my own home town of Flint, and now we see Detroit facing this insolvency. The state based solution to these problems typically have been replacing the existing management with different management that can presumably make different decisions that result in outcomes that are more favorable. I think what we’re facing, in my opinion and in my work across the country, is something much bigger than a failure in management but a structural failure, and what I think is potentially another institutional failure in the urban setting in municipal governments. I’m interested in your thoughts about the implications of that trend if you agree that it is taking place on our economy, and what solutions the federal government might consider if any to deal with that.”
Bernanke answered that “the last years have been a very tough time for state and local governments not only are income taxes down but property taxes have come down as well. As a result, state and local governments have cut work forces, cut capital programs. Many have managed to steady the ship, others are still under a lot of stress. obviously in the short term trying to promote job creation, what we’re asking Congress to do, is going to help economic activity in these areas and bring in tax revenues. There are obviously some parts of the country where there are longer term, more structural problems that are more than just the business cycle. Some of those may be in your state. There, I don’t really have the solution. The federal government did not in the past involve itself that much with stressed municipalities.”
Kildee followed up, “The federal government hasn’t involved itself in a lot of things until the necessity became clear and what I’m concerned about is that some state governments may not have the capacity, and cities failing will be a national problem, one way or the other.”