Local Governments: An Economic Bright Spot in the Recession?

Earlier today, I reported on Chicago's city-wide government shutdown on Monday in response to a looming budgetary shortfall of over a half billion dollars. That news, combined with forced furloughs and stagnant property values around the country, paint what should be a grim economic picture for local governments. Instead, not only has overall spending by local governments risen, their revenues have remained almost steady. The reason: the influx of federal stimulus money.

So, could local governments be an economic bright spot in the recession? It appears so. USA Today reports that the latest numbers issued by the Bureau of Economic Analysis two weeks ago had state and local spending up 4.8% -- a figure that some partially credit for the national GDP drop of only 1% this quarter, versus the 6.4% drop in the first quarter. They also note that, while local revenues have taken a hit due to falling taxes, that shortfall has largely been made up by the flood of stimulus cash. Since the stimulus funds come with a deadline for their use, local governments have an incentive to spend them right away -- and generally they appear to be doing so -- which accounts for the rise in spending.

Still, not all the news is good for local government. California was able to narrowly dodge insolvency this year, in part by pulling $4 billion from money set to go to local governments -- a move that left local officials furious and scrambling to make up the shortfall. And, a public hit hard by the flailing economy means more people than ever are depending on local services to weather the economic storm. On the other hand, Mississippi's governor Haley Barbour recently told the National Governors Association last month that, due to the stimulus funds, his state's budget this year would be its largest ever.