Moody's Talks - Inside Economics - Bonus Episode: State of the States

Episode Date: September 30, 2022

Mark, Ryan, and Cris welcome colleague Dan White of Moody's Analytics and Bill Glasgall, Senior Director, Public Finance at the Volcker Alliance, to discuss state and local government finances and whether it will be a tailwind or drag on the broader economy.Full Episode transcript.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight.William Glasgall is senior director, public finance at the Volcker Alliance, a New York-based nonprofit organization where he has supervised the publication of numerous working papers and studies, including four Truth and Integrity in State Budgeting reports. He is also the creator of the Special Briefing webcast series and podcast, co-produced with the University of Pennsylvania Institute for Urban Research, where he is a fellow.Be sure to check out Volcker Alliance’s new podcast “Special Briefing” hosted by William Glasgall available here: Apple Podcasts, Spotify, Google Podcasts, Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by a few folks. My co-host, obviously, and colleagues, Ryan Sweet, Ryan. How are you? I'm doing well. How are you, Mark? I'm tired, Ryan. You know, it feels like it's only, what, 930, and it feels like I've been up for five hours.

Everything is behind. I'm not sure what to make of all that. It's busy. It's crazy now. Crazy busy. And we got Chris DeReedy, Chris, Chris is the Deputy Chief Economist. How are you, Chris? I'm doing well, Mark.

How are you? Well, you're tired. I'm tired, man. I'm tired. I thought it was just me. You're not as sharp as you generally are. That's right. I need another coffee here.

And I had 20 ounces of my Wawa coffee, which is atypical. Usually 16, 20. Maybe that's the problem. You're off the hazelnut, though, right? Actually not. I had hazelnut today. I was thinking about pumpkin spice. I contemplated it for a few seconds, but couldn't pull the trigger.

It's too early for pumpkin spice. You got to wait to October. Yeah, that's true. Yeah, it's still kind of summerish out. Oh, it was supposed to change. First day of autumn, right? Oh, true. Yeah, exactly.

Yeah, we're taping this on September 21st, so when is autumn? It's like tomorrow or something. Yeah. Yeah, okay. And we got Dan White, Dan, our colleague who, hey, Dan, you got to say something. I do. I'll say something. Mark, I don't get to, I don't get to listen to these every week, like everybody else does.

Everybody should, right? But I listened to the one with Doug the other day because he's one of my favorites. Have you really never had a Chicago hot dog? Is that possible? I have never had a, no. I didn't know they were a thing. I didn't even know they were a thing. Really?

Ryan, you and Chris didn't give him. have nearly as hard a time on that as you should have. Like, that's ridiculous. Well, we beat them up a lot over guns and roses, so I had to take it easy on a hot dog. I'm going to stop listening to it because every time I listen to it, I get guns and roses or the hot dog one, and I'm like, I don't know if I can listen to it. I tell you what, we're all going to go to Chicago and we're going to have a hot dog while listening to Guns and Roses.

That's definitely on the bucket list. And where are we doing this? I mean, I assume we're going to go to the Cubs game or something. Watch that. No? Is that where you get the hot dog? anywhere you just get off the airplane and then they're right there in the airport wait is that true i mean what am i been missing this all my life i what do you guys talk they're all over did

you know they're all over they're all over all right i didn't know that well dan is uh uh manages our state and local government practice at i and actually government practice generally federal government state and local and does a fabulous job at that we have you were on the podcast early on about a year ago, so it's good to have you back on. I was. Yeah, back when you guys were just getting started, but now you guys are a big deal. Every time I talk to a client, they tell me how much they love the podcast. I was just on with some folks in Utah yesterday.

They were just raving about it. They listened to us in Utah. Cool. Yeah, Maddie from Utah listens to you every week. So this will be attached. Maddie, if I get an email from you, I'll know you actually listen to each one. Well, that's good to hear. Yeah, we are having a lot of fun with this.

And we also have another guest, Bill, Bill Glasgow, Bill, Bill, how are you? I'm just, I'm just great. I think you were going to say I'm peachy. No, I'm just fantastic. And what I want to know right off the bat before we get around to talking about serious, serious, serious stuff is since the start of the year, since January 1st, how much is the price of a 20-ounce wala, hazelnut coffee, and a Chicago hot dog gone up? And if you guys don't have the answer, we need it. That is, that actually is a really, reasonably good question. I don't know the answer you know why because it doesn't matter, Bill. It could be, you know, could go up 300 percent. I'm still buying that Wawa coffee. I'm totally

spicing elastic. I want to see the economist has the Big Mac index. I want to see the Voodies Economics, Wawa Coffee Index and the Chicago Hot Dog Index very soon. Yeah, we can work on that. We can work on that. And are you, did you know about the Chicago hot dog thing? I mean, I like, I'm. Of course. My mother, my mother came from Chicago. Of course I know about Chicago.

That's always where, you know, you're, you're, you're, yeah, where have I been? I don't know. I didn't know about guns and roses either until recently. So you guys don't even know about the difference between pork roll and Taylor Ham. Well, that's definitely true. Which is, which is no difference at all except where you live in Jersey. I'm a little nervous about this interview. I must admit.

You know way too much stuff. You know way too much stuff. But Bill, it's great to have you. And I've gotten to know you during the pandemic, really, because you've been teaming up with Susan Wachter at Penn at Wharton and putting on these, are they webinars? What would you call them? They're special briefings.

It's a monthly webinar series. And we've had Dan on, we've had you, Mark on, and people from the Moody's rating side and S&P and all over the place. And the special briefing podcast is coming out right about the same time. This podcast is going to appear. So we'd love to have you and your listeners join us either in the monthly webcasts or in the podcast version. Cool.

And this is part of your, you're the executive director at the Volker Alliance. Are you managing the Volker Alliance? I'm the senior director for public finance at the Volker Alliance and also a fellow like you at Pan, how you are. Oh, that's right. That's how Susan kind of fits into all this. I got it. I got it. And can you tell us a little bit about your history?

How did you land all these years at the Volker Alliance and a little bit about the Volker Alliance, too? Just for the listener to get a sense of that. Sure. Well, the Volker Alliance was set up in 2013 by Paul Volker, the late Fed chairman and Jay Powell's mentor, really, refers to him all the time. And Paul was a longtime public servant. His father was a public servant, and he really wanted to improve the efficiency and the knowledge, the effectiveness. effectiveness of the public service. Where I came along, where I came along is I learned about municipal finance, mostly through my time at Bloomberg, running state and local, state and local coverage. I'm a longtime economic and financial journalist at various places, including Business Week, Bloomberg, S&P. And Dick Ravich, the former lieutenant governor, was Paul's sweetmate,

and wanted to continue a program he had started about state and local budgeting. I took it over and we launched the truth and integrity in state budgeting scorecards, report cards that came out every year through 2019, looking at how sustainable in a fiscal sense and how transparent state budgets are, where they could be improved. We've helped some states, including Utah and Idaho, New Jersey even improved some of their budget effectiveness and budget transparency. And when the pandemic came along, we decided everything is one-time funds now.

It's kind of hard to give out grades when there's so much tumults in the system. So we're doing issue papers, conferences for now, and we'll go back to grading the budgets. Now the things are hopefully returning to somewhat normal. talk about what normal is. So that's it in a very short match job. Great. Well, it's good to have you aboard. And, you know, I should have said this up top, but, you know, clearly we're here in this podcast focused on the state and local government sector, which, you know, it's interesting when you, as a macroeconomist, you know, we spend a boatload of time trying to understand what the consumer is going to do and what businesses

are going to do and trade and inventories, federal government. But we generally kind of don't pay much attention to state and local government. And it's a pretty big piece of the pie, isn't it, Ryan? What, you know, how, do you, or Dan, do you guys have any sense of, I can't quite remember in the data, what percent of GDP is state and local government expenditures? Do you know? I do. Okay.

It's almost at 20 percent, I think, right? Yeah. It's, it's, it's, yes, it is. It's close to 20 percent. No. State and local. Government, government, government is. State and local government.

We're not talking about state GDP, but state and local government counts for about three, three trillion dollars in change a year. Oh, yeah, but that's not GDP. That's the total expenditures. That's the total expenditure. Yeah, yeah, yeah. But in terms of it's, I think it's closer to 16%.

It's like it's about one sixth of the economy, usually when you look at it. Oh, is that right? Okay. Yeah. Okay. And if you look at it. Okay, that's even more surprising to me, right? If you look at it, another way, it's an issue that we're exploring right now at the Volker Alliance with some partners.

The federal government, Congress, puts about a trillion dollars a year, $900 billion a year roughly into states, counties, cities, school districts, and the like. In grants and also tax, tax exemptions, tax credits and whatnot. So that is, that's something that's not very well studied and certainly not very well regulated. Every, every program funded by the feds is highly regulated and highly structured. The big picture Congress doesn't pay a heck of a lot of attention to, nor to the fact that the $4 trillion dollar municipal market, which is the principal infrastructure funding facility for the whole country, is essentially unregulated. and it has been since 1975.

Yeah, can you, Ryan, you've got the computer screen up, don't you? Yeah. Do you know what percent of GDP is state local government? Is it 16? I just took an average of the last few years. It's 17 percent. It is 17. Okay.

Okay. Sorry, Dan, I just had to check it. That's my one statistic for the day. There you go. I win. And that goes to my point, how surprising that is, right? I mean, that's a big deal. Like, business investment is, I think it's less than that, isn't it?

If I look at total business, fixed investment, Ryan, can you look at that? You know, what is, yeah, I'll give you a second to go look at that. Actually, state and local is probably bigger than fixed investment. Okay, here, maybe we can start the conversation. So it's a, the point, it's a big part of the economy. We tend not to really, at least macro economists, I know you guys do, but macroeconomists don't really spend a lot of time focus on that, which is probably a huge mistake. We take care of it so you don't have to, Mark.

Oh, I appreciate that. I appreciate that. And that's why you're so key to our thinking about this. So maybe we can begin the conversation around just kind of the financial health of state-loan governments broadly. And Bill, if you don't mind, let me throw that to Dan first. And then I'll turn it back to you. Dan, how would you characterize the current finances of state and local governments generally?

It's funny you should ask, because Emily Mandel, who's taking over a lot of our state and local government work and is fantastic, is actually finalizing our stress tests right now, the stress test that we do every year. And what we're finding is that states have never been in better shape financially than they are right now. They've never been better prepared for a recession. The stress tests are going to find that about 39 states can handle a recession without really having. to raise tax spending right now, and that is just orders of magnitude higher than we normally see in these companies. Bill, would you concur with that? Is that kind of, I mean, that was pretty definitive, I thought, Dan saying they're in great financial shape. Is that? Oh, I agree. I'd put a

couple of asterisks next to it because I like to always see my journalistic training says, you know, see, see the other side of the, the other side of the moon, too. And right, right, State rainy day funds are close to a record high, especially in terms of spending. States went into COVID in really, really good shape. In a way, not surprising because you had the longest economic recovery since 1857. States finally cured a lot of their worst excesses in terms of covering ongoing budget needs with one-time expenses. So they built up their rainy day funds.

So when the bottom fell out of the economy briefly, states were better off than you'd expect. Then states, cities, counties, all got huge infusions, not just $350 billion in direct budget money, but all of the COVID aid, plus all of the aid to individuals that, that ended up in increased spending and increased savings and generated more sales and income taxes. So states are cooking out.

So, you know, in terms of the health of state and local government finances, you both with, you know, the obvious caveats and asteris is that it's about as good as it's ever been in the data that you've observed. Is that fair to say? In the data, you can't find data that's better than this. Right. But then we've only really got good data back to the mid-1980s or so on a lot of this stuff. And when you say that, that goes to the strength of the revenue growth, the tax revenue growth, and it goes to, you observe rainy day funds. So the rainy day funds, these are cash accounts that

Stainville governments have set up for a rainy day, and they all are full at this point. They're full, but to Bill's point, they're full from before the pandemic. So states went into the pandemic in better shape than they've ever been. And if you couple that with the economic growth, we saw the outset and all of that federal money that flowed in both to states directly and through the rest of the economy and then end up in tax revenue, that really gave them, you know, a huge advantage going into whatever period of economic. I'm sure we can debate that for hours. But whatever the economy looks like over the next two years, they're about as prepared for it as they've ever. Ben. Okay. Hey, Bill, do you know, are there any states, I mean, because some states are better managed than others from a fiscal perspective. I mean, I think the poster child for troubled fiscal management

is like Illinois, you know, would be kind of a poster child. Is every state, including an Illinois, in a good financial situation right now, or are there still shades of differences here? I think shades of differences would be correct. In the immediate term, yes, every state is in good fiscal shape. And I know what you're dealing with states here. We could take a slight detour if you'd like in a moment about New York City. But, you know, you still have overhanging this substantial pension underfunding in many states, red and blue. Some of the states have been very, very responsible in putting extra money to pay down their pension debt, Connecticut.

is a great example, Illinois, even. So, you know, Kansas, Illinois, the usual suspects, New Jersey, Pennsylvania, California, these are states with big pension debts and debts for what's called OPEB, which is retiree health care. Those run into the many trillions of dollars. They'll probably be resolved over time, but they're still there. Infrastructure is another big if. a lot of maybe a trillion dollars in deferred maintenance that's sort of on the book's not really. It's it's not a well understood or well reported liability.

So there are issues. Right. Okay. And we're going to come back to those. But at the point, current point in time, Dan, any states or localities that kind of stand out as still troubled, despite all the good stuff that's happening? Yeah. Well, it's difficult. And there's shades of gray.

but the usual suspects are still not in great shape. So Illinois, we mentioned earlier. The one that is a big change, and you'll see this in the stress test when it comes out, is Alaska. They're usually number one in terms of preparedness, but they've blown through a lot of their reserve in the last 10 years or so,

and they've run out of reserve. They really don't have any left. And so there's a couple, it's really a handful of states that would have to make any kind of extraordinary fiscal action if we had a recession, but they're still out there. Got it.

And Alaska is a, Alaska is an odd duck for many reasons. You know, it lives on oil revenue and government funding. It has a $60 billion permanent fund. It's reserved for the day when oil runs out. That has helped feed the rainy day fund, which has been used to balance the budget for time in Memorial. So Alaska's budget lives on kind of a knife edge, good times and bad. Okay. And Dan, you mentioned these stress tests a couple times. Do you just want to quickly explain what that is to the listener?

Sure. Yeah. It's something we've been doing on and off since about 2014. And it kind of takes a page out of what Chris and Ryan and you have done a lot with the banks, which is stress testing their budget. So we take alternative economic scenarios and we run them through our revenue forecast and our Medicaid forecast because it's a mandatory spending item when we go into a recession, spending on Medicaid is almost as important as losing tax revenue, because they've got to make up for that money somehow. So we run through those and we see what the fiscal shock would be for those states. And then we look at how prepared they are for that fiscal shock. And what that tells us is who are the states that are going to have to raise taxes a whole bunch and who's going to have to cut spending in the middle of a recession? Because that's the worst time, you know, you go back to your macro one-on-one. The last thing you want to do during a recession is raise taxes or cut government spending. And during the Great Recession, that's what a lot of states had to do.

And it's one of the reasons why the Great Recession was followed by the not-so-great recovery. It took states in particular more than 10 years to recover all the jobs that they lost during the Great Recession. Yeah. Hey, Ryan, so back to you. Did you pull up the business investment as a share of GDP? I did. So it was a share of nominal GDP. It's 18%.

Oh, a share of nominal GDP. Okay. Okay. All right. So it's about the same, roughly the same as Steele, which is just, I wouldn't have said that. I should know that off the, you know, but I, would you have said that, Ryan? No, I was surprised. Yeah, I was surprised.

The one contribution that will be interesting to watch to that point is not just the GDP, but the employment number. If you look at the overall employment, it has been, as a share of total, it has been falling significantly in the last 20 years. If you look at the one number that we just called out in our piece that we did last week, is if you look at state government non-education, so you take the schools, the universities out of it, they're at the lowest level of employment. They've been to be 1993 in an absolute number. So in 1993, we had more state government employees outside of colleges than we have today.

Well, I think the pandemic did a number on K through 12, right? I mean, getting... Right, so excluding K through 12. That's just state government. Oh, I see. You know, your state government. Yeah, just state government. I see.

Interesting. State governments are very gun-shy, and they're actually state and local governments are all approaching a huge watershed because the workforce is getting older. COVID has accelerated the retirements, and what are they going to do? Will they continue to do what the federal government has done and just outsource a lot of jobs to nonprofits, consulting firms? You especially see this in the Medicaid arena. and the technology arena. And that may be the course. So rather than take on those huge pension liabilities

and OPEB liabilities, make it somebody else's problem. I think that's a big opportunity though, Bill. I'm sorry to interrupt. That's a big opportunity because what states are doing is now that they've got all this money from the federal government, the mock against that bill has been for the longest time.

We can't do the technology investment. We can't bring in the outsourcers because we just don't have the cash. especially a one-time cat. Now they've got all kinds of one-time cats. It's a really great opportunity for them to change those processes and make them a lot more efficient than they've ever been. You know, turning back to the link between state and local government and the broader economy, macro economy, and this is a narrative I have in my mind, and I don't know if this is right or wrong,

but historically, you know, during recessions and on the backside of recessions, early recovery, state local governments are kind of retrenching, they're pulling back. not adding to economic growth. In fact, obviously in the wake of the financial crisis, they were a big drag on economic growth, you know, coming out of that recession for the first part of that recovery. It was really only until the end of that long expansion that they started to really kick into gear in terms of contributing to economic growth. In the current environment, it doesn't feel like they're adding to growth to any significant degree, which I'm curious about why, given their financial situation. But they're not, I guess they're not

subtracting from economic growth. Is that narrative right, roughly right? Do I have that right? Yeah, I mean, the spending side, they're contributing a lot more on the spending side than the employment side. But on the spending side, their nominal numbers are really being squeezed by inflation. Their real impact has been almost zero, but their nominal numbers are up like seven or eight percent. That's a really, really important point. Budget for state budgets for fiscal 23, according to NASBO, the state budget officers. So they have state budgets for 23 up about 1% and a fraction in nominal terms. So in real terms, state spending is really going backwards.

If I do my arithmetic, right? And where you see strong revenue collections in real terms, it's in sales taxes because the sales taxes rise along with the goods prices. income taxes are not going to be following, following inflation up. So despite despite these extraordinarily good financial conditions, state and local governments are not adding to economic growth and sounds like maybe even a drag. If nominal is low single digit, inflation is mid-high single-digit, then real is declining. how do you square that circle, you know, or maybe what we're not picking up here is the tax

cutting that some of the state and local governments are doing? Because I'm looking just at the, I'm not, I'm looking at the kind of the expenditure side. They could also be helping the economy out if they're cutting tax, you know, well, helping, I guess, depends on your prism, you know, given the high inflation. But do it, anything to add there? I mean, I'm a little confused by it. Why aren't we seeing more government, state and local government spending going on, at least in the data? My anecdotal opinion is that they're being careful.

They've learned some lessons from the recovery from the Great Recession. We've done a lot of survey work on how states are spending their $195 billion share of the state and local fiscal recovery fund. they've been pretty good with a couple exceptions on not using that $195 billion to prop up existing programs, continuing programs that will have no visible source of support where the money runs out in 2026. So they're using this money to fill holes where they can. There's about 32, 33 states that have done some kind of tax reduction move, rebates, credits, actual reductions. A lot of it is really focused on giving money back.

So it's money they collected, money they collected, and they're just, you know, they're handing it back to you. Okay. So the good, strong finances are the result of a few things, just to summarize, you get to make sure I have it right. One is they kind of came into the pandemic in a pretty good spot, you know, financially. Secondly. Second, they have been cautious in kind of managing their finances, you know, wanting to build those rainy days and obviously not spending a lot of it on a real basis.

Third, they got a lot of support from the federal government. You've alluded to that bill a few times. The American Rescue Plan that was passed in March of 21, I think it had $500 billion in total for state and local. A big chunk of that was for schools, like $150 billion, or for K through 12, I believe. the other $350 billion, right. When basically checks cut to state and local governments. Right. They have through when, 2026 to spend that or to use that money, is that right?

Right. From that, that's, that's right, 2026. And there's some other school aid that expires in 2025. It's very important for New York City. Yeah. And then, of course, the economy's been strong broadly and that's helped in the stock market had been strong and now back in, which actually helps at least temporarily juice up personal income tax revenues in states with capital gains because people taking capital gains on the high rely. They're realizing the gains that they've accrued.

So tax revenue is very strong. And, of course, the inflation has been strong, so that adds to state local government. That adds to sales taxes. And then until recently, house price is very strong, so that adds to property tax. So everything kind of sort of going in the right direction. for state and local governments and that's their current financial situation. Okay. All right, then let's turn to, so do I have that right?

Did I get that right? You know, you guys, Bill, Dan, did I miss anything that that feels about right? Okay. So what are they, we've talked about this a little bit, but, you know, what are they doing with all this cash? Or what do they have planned, you know, to do with all these resources going forward? going to see state law governments kind of become more of a contributor to broader economic growth more jobs more GDP you know more support to the economy bill is that is that in train i don't i don't see state and local employment as a as a big engine of growth maybe dan will disagree

with me i i think there's a lot of conservatism baked into uh baked into this the system here It's just, you know, everybody, everybody's complaining we have open positions. There was a survey of the, of the associate by the Associated General Contractors a few weeks ago. And every state they surveyed say, we don't have enough engineers, we don't have enough finance people, architects, you know, ditch diggers, you name it. But they didn't have enough, they didn't have enough of these people before the pandemic either. So there's so governments are are making do with with with smaller workforces or smaller workforces per dollar of output if if you will and I don't see there I don't see that changing New York City was a bit of an outlier especially under the previous

administration added about 10% to the to the workforce New York City was was really flush now the city's got a Iranian A fund that would cover about half of the deficits that the Adams administration envisions over the next three years. So New York City's got some fiscal cliff issues when the federal money runs out. That may not be unique, but mass transit systems are going to have some big issues. New Jersey is investing quite heavily now in new train sets, station upgrades. They're actually putting money into capital. Not clear what's going to happen if there's a recession and no federal funds.

Right. Right. Dan, what do you think state and local government is going to do with all this financial resource that they have right now? Are they going to be the bill's making the case that they're going to remain cautious and I guess more one-time projects than standing up programs that require ongoing. funding, although that's happening too. Is that, is that rough, is that roughly your view on on how this is playing out? He's on the, he's on the right track, but I think there's going to be, there's going to be a decent size GDP hit from states as they spend this money because it's got to go out the door. It has to go somewhere. But it's going to be all one time. And I think

rightfully so, because the reason states are being so conservative is because this is one time money. They've seen what happens when you take one time monies and put them into recurring programs. It's really, really ugly. It's a lot of problems. So they're putting it all into these one-time brought things. I think where the opportunities are, and I think hopefully this will help in the future, they're not going to find enough workers to fill all these jobs the way they used to to build the point. So they've got to be investing in process improvements and in technological improvements. And in some cases, bringing in outsourcers. I know Bill would talk about that earlier, but you've seen the labor market that we're in, Mark, better than anybody. It's really hard labor

market to exist in right now. Imagine not being able to raise people's salaries, not being able to add positions, not being able to do all these things. There's a lot of of handcuffs that are on government hiring managers and they just can't operate in this dynamic of a labor market they need some of those contractors to come in and be a little bit more dynamic with hiring and things and that's really what they've got to do you said hit to GDP did you mean add to GDP yeah I'm sorry it'd be a bump to GDP there should be a bump to GDP from them spending yeah so so you think because they have all this cash they have to especially the American Rescue Plan money they've got to spend that

or deploy it, tax cuts, whatever, by 2026, so that's the next several years, then that as they deploy that, that will help support economic growth here. So the state loan government is unlike coming out of the financial crisis when they were a headwind, they're going to be a tailwind to economic growth. Yeah, and it could be a marginal tailwind to Bill's point, but there's still going to be a tailwind in terms of some of that investment, especially technological investment, things like that. Yeah, and your broader other point is this may be a GDP thing. It's jobs are going to be a lot harder.

Jobs are going to take forever. I mean, it took twice as long in the great recession for them to come back, for state and local jobs to come back. And you use that same logic. It's going to be at least another three years before state and local government payrolls get anywhere near where they were before the pandemic. You know, Bill, it used to be the case before Dan joined me. I would get invited to all of these, you know, NASBO, NGA, you know, all these functions, FTA.

Now I don't get a call from any of them. They go right to Dan, which... They still love you, Mark. Is that right? That's what they tell me. They say, tell Mark, we still love. I need some love. I get a call every once in a while.

But they like me because I think like a budget officer. I have like correctly predicted seven of the last two recessions, and that's exactly how they love. And they love it all. That's the trick. You're too optimistic for them. Yeah. man, oh, that, you know what?

I think that makes a lot of sense to me. Yeah, that makes a lot of sense. In a way, it doesn't matter that you predicted seven of the last two recessions. What matters is that you're doing stress tests. And what matters is, is the states that are doing stress tests and long-term, long-term budget scenarios. There's only about, we have a paper on this coming out, God willing, in a couple of months. about about half the states don't don't look much beyond the end of their nose they

they look at the fiscal year and then maybe one year out can i say if you keep talking like that you're not going to get invited to any of these things i don't no no i'm very happy to criticize and to praise the states like utah or maryland okay there now he's sucking up you see that now he's sucking up he realized he went overboard he would another shout out to you He went another shot out. He wants to go to Park City or something. I can feel it. I'm just saying that states and cities and cities that can invest a little bit to take a long-term, a long-term view, they're not going to hit it on that.

They're not going to hit the nose. They're hit it right on the nose. What they're going to do is look at possibilities. So what's our structural deficit? New York City does this Maryland, does it? great job of this. What's our structural deficit going out four years? So then we can apply your and Dan's best case scenario, mid-case scenario, worst-case scenario, and look at what's might happen to revenues. And that's really, really important, and not enough states do this

and should. Yeah. Yeah, it makes sense. I just want to just end that conversation on the relationship between state-level governments and the economy and back to jobs. And I have been invited to a few events, and the one question I have been getting is help me with my labor supply problem. What should I do? And I've been flummoxed by that question. But your answer, Dan, seem to be labor-saving technology, investment. I've got to improve productivity. I've got to do more, provide these services with fewer people.

Is that the answer? This is a great economist answer, but it depends, right? It depends on what they're trying to fill. If they're trying to fill call center people to answer unemployment insurance stuff, that's outsource that. That's an easy one to outsource. But if it's, you know, economists in the state budget office, that's different. You've got to attract it. And where state and local governments are seeing, you know, for the last 25 years go down,

is that as all those pension issues that have popped up, we've had to deal with not being able to offer as good benefits, the OPEB and the other post-employment benefits. and all that stuff that they used to use to attract people and keep them there for their whole careers, they're not as generous as they used to be. And so they need to come up with other tools to keep people in the workforce. Yeah. Anything to add there, Bill, on the laborers.

And that's difficult. You know, if we have a recession, what's your odds as of this? Oh, you're playing on, Bill, you didn't ask me what was easy. And you just said, how do we fix it? It doesn't necessarily make it easy. I don't think I fix it. I think it's going to be technology, higher salaries, higher compensation, where a need be, if they can afford it. And for the states that are cutting income taxes, going to a flat tax, cutting tax rates, they may be constraining their futures.

They're doing great now and they can give it back. I like the states that are cutting taxes with a trigger. So if revenue doesn't make a certain hurdle, then they won't do the next tax cut. So even the states, some states like Indiana are being cautious about tax cuts. You know, we want to make sure it's there. Yeah, I want to come back to some of the challenges, longer-term challenges to the St. Longer government's face. But one other question I had was the infrastructure legislation passed at the

the federal level back last fall is going to provide a lot of funds for infrastructure projects, you know, and that's starting to kick into gear, I think, and starting up now, but really in 23 and then particularly in 24, 25, does that complicate things for states? Does that supplement or, you know, how does that, or is there any kind of relationship at all between that legislation and what state-old governments are going to be doing? I don't think it complicates it. Dan probably has the macro picture. It's, it's, of that trillion dollars,

about about half of the trillion dollars in the infrastructure bill is, half of that was the highway bill, was already spending that was already there. Pretty much already planned and continuing. So you're talking about spreading $500 billion. It's a big number, but over 10 years. Okay. A lot of states and cities are complaining that,

that bridge that was going to close, me $200 million is now costing me $300 million. It may be that this money won't go as far, but 50, you know, so $50 billion a year in a $20 trillion economy, I'll let you do the math. Got it. And it's, it'll be a marginal extra kick. A nice, a nice, nice, nice boost for jobs, a nice boost for, for the states to be sure. But I don't think this is going to be an ethical event. Yeah. When the Congressional Budget Office, the federal budget keepers kind of think about infrastructure spending at the federal level, they always make an assumption that state local governments, because they're the ones that are kind of on the front lines of the infrastructure spending, actually pull back on the spending they would have done otherwise. So the net impact on infrastructure spending is reduced. Does that resonate in this case as well? I mean, is that going to happen here, too, Dan, do you think? Yes. Yeah, CBS has done some really good work on that. historically, and they've probably got the best numbers out there on it. But to Bill's point,

there's a lot of differentiation from one state, the regional impacts of this are going to be huge. The states who were ready, you know, I hate to use that great recession trouble ready thing again, but that states who had everything ranked and prioritized is what if we get money we're going to spend on before, they got that money out the door fast and they got it allocated quickly. They're not getting hit by inflate as much. But the ones they went, oh, here's an extra couple hundred million dollars. What do we do with it? They're not going to see the same benefit. Yeah, okay. Okay, let's turn to the challenges.

And Bill, you mentioned, and Dan, you mentioned a few, and I want to get a sense. I'm going to list a couple, and maybe you can add to the list, and then we can tell me which you think is at the top of the list of concerns that we should focus on. We talked about the expiration of the American Rescue Plan money in 2026, and I think you characterize it as like a cliff, a fiscal cliff. So I got all this cash. I got all this money. it's gone. So, you know, what happens on the other side of that? You mentioned the pensions. It's kind of been a perennial

long-term issue. And then you've also mentioned the fact that some states are using the current environment to, you know, fund ongoing spending or tax cuts that, you know, aren't triggered in any way. They're kind of there and, you know, what happens, you know, at the other end. are there other things that should be on that list of longer-term challenges? And what should be at the top of the list? Well, the problem that states are seeing is that state government budgets, I've started looking awful like the federal budget and not in a good way. So more of the state budgets go to Medicaid and other social benefit payment than ever has gone on the path.

And the reason is that the inflation on those programs over the last 20, 30 years has gone at a much faster-paced in tax revenues. And so they're supplanting from education or whatever else they used to spend that money on and they're spending more of it on Medicaid. It's one of the reasons why they just can't afford to have as many employees as they used to do. That's the same problem that the federal government is saying. And it's just slowly going to eat away more and more and more. And so they either have to get much more efficient at all those other services or they've got to change Medicaid. And they can't change it.

They've got to have the federal government change that for them. I agree. Medicaid has been increasing. very steadily in real terms for forever since the 1970s, and taking up a bigger share of state spending. As our society ages, it's an ever bigger, an ever bigger piece of the pie. There's a very interesting immediate question for Medicaid

that maybe Dan knows more about that than I do, is that the states are getting special COVID dispensation, even the states that didn't take expanded Medicaid support. So this is sort of from six months to six months to six months declaring medical emergencies. At some point, either this special funding is going to end or we're going to decide that COVID, that COVID is a reality. And a lot of this special funding is just really ongoing funding. I have no idea how this comes out. But that's a big budget concern for states.

now. How much money is that the COVID funding? Do you know? How big a deal is that, the special I'm muted. I can't remember the last, the last numbers. It's like between 50 and 75 billion a year. Oh, it is. Oh, it is. Oh, okay. It's consequential. Yeah. Yeah. Okay. Well, the bigger consequence in the near term fire drill that they're going to run into, Bill, is when that money does expire, and most people assume it's going to expire in the first, expire in the first quarter of next year when the COVID pandemic goes away is that they're going to have to do determinations on all of the people who came on to Medicaid during the pandemic. One of the strings attached that money mark was that you couldn't kick anybody off of Medicaid during the pandemic for any reason. So even people

who didn't qualify for Medicaid anymore had to stay on. So now they've got to go through mountains of paperwork and millions of people who joined Medicaid and figure out who still should be on Medicaid and who shouldn't. And they can't find the people to hire to do that. It's a huge workload and they've got a certain amount of time they've got to do it and it's a big fire drill that they're going to be dealing with a lot lately there's another there's another wrinkle non-medicate wrinkle which is unemployment insurance at the peak states owed about $52 $53 billion you many states habitually underfund their unemployment insurance programs because they can always go to the treasury and ask for a check

And during COVID, interest was accrued but suspended on those loans. So everything was fine. But there's several states now with some large balances outstanding. California had about $17 billion in loans outstanding. New York has about eight-ish, I believe. Nobody knows what New York is going to do. But I talked to one official in California who assumes that the state is going to raise taxes on employers to help pay this off. This is what New Jersey did last year and this year.

State of Michigan after the Great Recession put a special assessment on employers that used that to borrow through the bond market to pay that off. So New York's, New York State's got an $8 billion mini fiscal cliff. You know, that's a, that's a good share of the budget. California, $17 billion. It's not quite the same as the rainy day fund. But there are taxes going up even now. Right. Okay.

So to add to the list of the issues around Medicaid that have been, there were long run. but exacerbated by the pandemic and the response to the pandemic. And unemployment insurance also, you know, related. See, Mark, this is why they like it because we're always full of sunshine and rainbows all the time. Yeah. Well, no, that's what I want. I was asking. Is there any other significant challenges?

I'm sure there are, you know, things that we don't even know that will come up. But anything like that's on the radar screen right now that you would call out as a challenge, you know, over the next few years? I think union union labor agreements that are coming up for renewal are a big deal. In some places like New York State, if unions don't come to an agreement, then the terms of the older contract remain in place. It's looking like unions are not gaining in real terms, so they're losing ground. but this is a large issue for New York City with a workforce of authorized workforce of about 320,000

and tens of thousands of vacancies right now. That's where the city is saving a lot of money at the cost of reduced services. Right. Okay. Okay. So just to sum up from a macroeconomic, my kind of prism, the macroeconomic perspective, I would, the way I'm landing based on the conversation, is, you know, one, state and local government finances are good, about as good as they've ever been.

Two, state and local governments are going to be a bit of a tailwind to the economy, you know, over the course of the next several years. Not a tail one that's blowing really hard, but certainly not a headwind like it has been historically coming out of recessions, which is a good thing. But three, there are some pretty significant challenges here, some of which were long in the making, you know, pension plan, pension underfunding would be an example of that. Some exacerbated by the pandemic, the U.I program, the Medicaid program, you know, that would qualify, and the expiration of the American Rescue Plan. And so we've got some challenges, you know, down the road here. but you know for the time being for the next few years we should get a bit of an economic tailwind from the state law government is that fair is that a good characterization of the conversation do you think i think so bill okay yeah yeah yeah dan okay okay okay good uh chris and ryan uh any you know you've been listening to the conversation uh where would you know we got a few more minutes left you know anything you'd want to a push and press on and explore anything I missed that you'd like to ask Bill and Dan go to you Chris first yeah no I think you I think

it was excellent summary of the current state and future states of the states um I guess I was a bit surprised by the or impressed by if I'm reading correctly that the states and local governments have gotten more efficient over time at least that was one of the takeaways yeah I took and uh another one was that it sounds like we need a push in terms of we talk about infrastructure investment it seems like government infrastructure investment needs to occur as well to make this whole equation work you mentioned technology labor saving technologies outsourcing right so it seems like more generally that has to be a priority not only for the states but for the national government as well did i uh read that correctly or yeah but to bill's point

some of that improvement in efficiency is moving from the 18th century to the 19th century. It's not like they're moving from 2010 to 2050. Now, you may not be invited back. They're going to ask me back after that comment. They're going to be the first ones to say that. Yeah, right. Ryan, anything you want to get the Googles and the apples in there as well to make some infrastructure investments? Is that what you're saying?

They would love it, I'm sure. But especially at the local level, there's a lot of those kind of things that just can make. things a lot easier for everybody because if you can't have more people you've got to get more productive there's no other way to do it yeah and Ryan anything you wanted to press on or ask or no I mean the only thing I would stress is that this tailwind is it's a small tailwind I mean the most that state and local governments have added to GDP since 1980 is 6 tenths of a percentage point so oh really in the discussion I was wondering I was like yeah maybe my recession odds are too high but no no it's marginal yeah but it always is to Mark's point it's coming out of

of a recession, the government should be a tailwind because it's what was supporting the economy during the downturn. It should be. Although they typically stay local governments, correct me again, just so I have this right, they are a headwind generally. You know, they are pro-cyclical. They're not counter-cyclical like the federal government. That's my. Yes, no, they should be. Yeah, they should be. I think we're getting our winds confused. Yeah. Oh, okay. It should be a drag on growth after the the, uh, oh, okay. It should be a drag on growth after the recession. They should always be a drag on growth. You know, Stan, he's flipping all these phrases. Hit means good, you know, bump means bad.

You've got to get him on the podcast more often. I've been hitting the head a lot, Mark. You've got to be some grace. You got to watch out during the statistics game with Dan, right? Oh, I'll get the signs right. Yeah, the pluses and the minuses. Yeah, exactly. Hey, well, this was a great podcast and really enjoyed the conversation.

And Bill, I want to thank you for taking the time. Again, you've got the first edition of your podcast coming out on the special briefing podcast next Friday. Is that right? God willing, on Apple, Google, Spotify, and all the same wonderful podcast platforms you're probably on, too. Okay. Well, I promise. I'm going to tweet yours. You tweet mine and we'll be good.

Sound good? Absolutely. Absolutely. Okay. And we'll have you. Hopefully you'll be willing to come back on. at some point in the future. And we, you know, Ryan strives to be a 49% right.

So if you could just do 50-51, you know, you're golden. So just saying, sorry, Ryan, I had to get that. I mean, I have not ragged on you the entire podcast. I know. This was the first. Yeah. Well, with that, we're going to call this a podcast and hope you enjoyed it. And we'll talk to you next week.

Take care now.