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.
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,
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by a few folks. So my co-host, obviously, and colleagues, Ryan Sweet. Ryan, how are you?
Ryan Sweet: I'm doing well. How are you, Mark?
Mark Zandi: I'm tired, Ryan. Feels like... It's only, what? 9:30 and it feels like I've been up for five hours. Everything is behind, I'm not sure what to make of all that.
Ryan Sweet: It's busy. It's crazy now.
Mark Zandi: It's crazy busy. And we got Cris deRitis. Cris is the Deputy Chief Economist. How are you, Cris?
Cris deRitis: Doing well, Mark. How are you?
Mark Zandi: Well, you're tired.
Cris deRitis: I'm tired, man. I'm tired. I thought it was just me.
Mark Zandi: You sound tired too. Yeah. You're not as sharp as you generally are.
Cris deRitis: That's right. I need another coffee here, but...
Mark Zandi: Yeah. And I had 20 ounces of my Wawa coffee, which is atypical. Usually it's 16, 20... I'm... Maybe that's the problem.
Cris deRitis: You're off the hazelnut though, right?
Mark Zandi: Actually not.
Cris deRitis: Gosh.
Mark Zandi: I had hazelnut today. I was thinking about pumpkin spice. I contemplated it for few seconds, but couldn't pull the trigger.
Ryan Sweet: It's too early for pumpkin spice. You got to wait to October.
Mark Zandi: Yeah, that's true. Yeah. It's still kind of summer-ish out there. Well, it's supposed to change.
Cris deRitis: First day of autumn, right?
Mark Zandi: Oh true. Yeah, exactly. Yeah. We're taping this on September 21st. So when is autumn? It's like tomorrow or something, isn't it?
Cris deRitis: Yeah.
Mark Zandi: Okay. And we got Dan White. Dan, our colleague who, hey Dan, you got to say something.
Dan White: I do. I'll say something.
Mark Zandi: Okay.
Dan White: Mark. 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.
Mark Zandi: Yeah.
Dan White: Have you really never had a Chicago hot dog? Is that possible?
Mark Zandi: I have never had a, no, I didn't even know they were a thing. I didn't even know they were a thing. Really?
Dan White: Ryan, you and Cris didn't give him nearly as hard a time on that as you should have. That's ridiculous.
Ryan Sweet: Well, we beat him up a lot over Guns N' Roses, so had to take him easy. Take it easy on the hot dog.
Dan White: I'm going to stop listening too, because every time I listen to it, I get Guns N' Roses or the hot dog one. And I'm like, I don't know if I can listen to this.
Mark Zandi: I'll tell you what, we're all going to go to Chicago and we're going to have a hot dog while listening to Guns N' Roses.
Cris deRitis: Hot.
Mark Zandi: 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?
Dan White: Anywhere. You just get off the airplane and then they're right there in the airport.
Mark Zandi: What? Wait, is that true? I mean, what have I been missing this all my life? What are you guys talking?
Cris deRitis: They're all over.
Mark Zandi: Chris, did you know? They're all over. They're all over. All right. I didn't know that. Well, Dan is, manages our state local government practice. Oh, 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.
Dan White: 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.
Mark Zandi: They listened to us in Utah. Cool.
Dan White: Yeah. Matt, Mattie from Utah listens to you every week. So this will be attached. Mattie, if I get an email from you, I'll know you actually listen to each one.
Mark Zandi: Great. Well, that's good to hear. Yeah, we are having a lot of fun with this. And we also have another guest, Bill. Bill Glasgall. Bill, how are you?
Bill Glasgall: I'm just, I'm just great.
Mark Zandi: Oh, I thought you were going to say I'm peachy. You were going to say I'm peachy? No.
Bill Glasgall: Well, I'm fantastic, I think is the word. 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 has the price of a 20 ounce Wawa hazelnut coffee and a Chicago hot dog gone up and if you guys don't have the answer, we need it.
Mark Zandi: That actually is a reasonably good question. I don't know the answer. You know why? Because it doesn't matter, Bill. It could go up 300%. I'm still buying that Wawa coffee. I'm sorry.
Bill Glasgall: But I want to see...
Mark Zandi: Totally spice and elastic.
Bill Glasgall: I want to see, The Economist has the Big Mac index. I want to see the Moody's Economics, Wawa Coffee Index and the Chicago Hot Dog Index very soon.
Mark Zandi: Yeah, we can work on that. We can work that. Did you know about the Chicago hot dog thing? I mean, I'm like-
Bill Glasgall: Of course.
Mark Zandi: Of course.
Bill Glasgall: Of course. My mother came from Chicago. Of course I know about Chicago hot dogs. Where have you, you're in Pennsylvania.
Mark Zandi: Yeah. Where have I been? I don't know. Didn't about Guns N' Roses either until recently. So.
Bill Glasgall: You guys don't even know about the difference between pork roll and Taylor Ham.
Mark Zandi: Well, that's definitely true.
Bill Glasgall: Which is no difference at all except where you live in Jersey.
Mark Zandi: I'm a little nervous about this interview. I must turn it. You know way too much stuff. 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 Walker at Penn, at Wharton and putting on these, are they webinars? What would you call them?
Bill Glasgall: They're special briefings.
Mark Zandi: Special briefings.
Bill Glasgall: It's a monthly webinar series. And we've had Dan on, we've had you, Mark, on, we're had people from the Moody's ratings 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 web or in the podcast version.
Mark Zandi: Cool. And this is part of your, you're the executive director at the Volcker Alliance? Are you managing the Volcker Alliance?
Bill Glasgall: I'm the senior director for public finance.
Mark Zandi: Got it.
Bill Glasgall: At the Volcker Alliance and also a fellow like you at Penn IUR.
Mark Zandi: Oh, that's right. I didn't. That's how Susan kind of fits into all this.
Bill Glasgall: Indeed.
Mark Zandi: I got it. I got it. And can you tell us a little bit about your history? How did you land at all these years at the Volcker Alliance and a little bit about the Volcker Alliance too, just for the listener to get a sense of that.
Bill Glasgall: Sure. Well, the Volcker Alliance was set up in 2013 by Paul Volcker, the late Fed chairman. And J 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 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 coverage. I'm a long time economic and financial journalist at various places, including Business Week, Bloomberg, S&P. And Dick Ravich, the former lieutenant governor was Paul's suite mate 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 and 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, improve some of their budget effectiveness in 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 tumult in this system. So we're doing issue papers, conferences for now, and we'll go back to grading the budgets now that things are hopefully returning to somewhat normal and we can talk about what normal is. So that's it in a very short nutshell.
Mark Zandi: Great. Well, it's good to have you aboard, and I should have said this up top, but clearly we're here in this podcast focused on the state and local government sector. Which it's interesting when you, as a macro economist, we spend a boatload of time trying to understand what the consumer's going to do and what businesses are going to do and trade and inventories, federal government. But we generally don't pay much attention to state and local government. And it's a pretty big piece of the pie, isn't it, Ryan? 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?
Bill Glasgall: I do.
Mark Zandi: Oh, you do. Okay. What is that, Bill?
Dan White: Yeah, close to 20%, I think. Right, Bill?
Mark Zandi: No.
Bill Glasgall: Yeah, depending on it. Yes, it is. It's close to 20%. State and local.
Mark Zandi: Government. Government is.
Bill Glasgall: Government. State and local government. Not, we're not talking about state GDP, but state and local government counts for about 3 trillion dollars and change a year.
Mark Zandi: Oh yeah. But that's not GDP. That's total expenditures.
Bill Glasgall: That's the total expenditures.
Mark Zandi: Yeah, yeah, yeah.
Bill Glasgall: GDP.
Mark Zandi: But in terms of it's-
Dan White: It's more, I think it's closer to 16%. It's like it's about one sixth of the economy usually when you look at it.
Mark Zandi: Oh, is that right? Okay.
Bill Glasgall: Yeah.
Mark Zandi: Okay.
Bill Glasgall: And if you look at it.
Mark Zandi: That's even more surprising to me, right?
Bill Glasgall: If you look at it another way, it's an issue that we're exploring right now at the Volcker 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 exemptions, tax credits, and whatnot. So that's something that's not very well studied and certainly not very well regulated. 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 has been since 1975.
Mark Zandi: Yeah. Can you, Ryan, you got the computer screen up, don't you?
Ryan Sweet: Yeah.
Mark Zandi: And this, do you know what percent of GDP is state and local government? Is it 16?
Ryan Sweet: Sorry, I just took an average over the last few years. It's 17%.
Mark Zandi: It is 17. Okay. Okay. Sorry Dan, I just had to check it 'cause that-
Dan White: That's my one statistic for the day. There you go. I win.
Mark Zandi: 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?
Ryan Sweet: Yeah, give me a minute.
Mark Zandi: Yeah, I'll give you a second to go look at that. I think 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 tend, I know you guys do, but macro economists don't really spend a lot of time or focus on that, which is probably a huge mistake.
Dan White: We take care of it, so you don't have to, Mark.
Mark Zandi: Oh, I appreciate that. I appreciate. We need, and that's why you're so key to our thinking about this. So maybe we can begin the conversation around just the financial health of state and local 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?
Dan White: 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. They're stressed that they're going to find that about 39 states can handle a recession without really having to raise tax or cut spending right now. And that is just orders of magnitude higher than we normally see in these companies.
Mark Zandi: 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?
Bill Glasgall: Oh, I agree. I'd put a couple asterisks next to it because I like to always see my journalistic training says see the other side of the side of the moon too and 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 dollars in direct budget money, but all of the COVID aid plus all of the aid to individuals that ended up in increased spending and increased savings and generated more sales and income taxes. So states are cooking now.
Mark Zandi: So in terms of the health of state and local government finances, you both with the obvious caveats and asterisks that there, it's about as good as it's ever been in the data that you've observed. Is that fair to say?
Dan White: In the data, you can't find data that's better than this. So, and the data's only, we really got good data back to the mid 1980s or so on a lot of this stuff.
Mark Zandi: 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 state and local governments have set up for a rainy day and they all are full at this point.
Dan White: They're full, but to Bill's point, they're full from before the pandemic.
Mark Zandi: Oh, they were? Oh, okay.
Dan White: So states went into the pandemic, they went into the pandemic in better shape than they've ever been. And if you couple that with the economic growth we saw at the outset in all of that federal money that flowed in both to states directly and through the rest of the economy and then ended up in tax revenue, that really gave them a huge advantage going into whatever period of economic we, I'm sure we can debate that for hours, but whatever the economy looks like over the next few years, they're about as prepared for it as they've ever been.
Mark Zandi: 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 Illinois would be kind of a poster child. Is every state including in Illinois in good financial, a good financial situation right now? Or are there still shades of differences here?
Bill Glasgall: 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 for about New York City, but you know, 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, 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 healthcare. 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 books, not really. It's not a well understood or well reported viability. So there are issues.
Mark Zandi: Right, 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?
Dan White: Yeah, well, it's been from, 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 reserves in the last 10 years or so. And they've run out of reserves. 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.
Mark Zandi: Got it. Okay.
Bill Glasgall: And Alaska is Alaska an odd duck for many reasons. It lives on oil revenue and government funding. It has a 60 billion permanent fund, so 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 a kind of knife edge, good times and bad.
Mark Zandi: Okay. And Dan, you mentioned these stress tests a couple times. Do you want to quickly explain what that is to the listener?
Dan White: 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, increased spending on Medicaid is almost as important as moving 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 recessing because that's the worst time. 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.
Mark Zandi: Yeah. Hey, Ryan, so back to you. Did you pull up the business investment as a share of GDP?
Ryan Sweet: I did, so as a share of nominal GDP, it's 18%.
Mark Zandi: Oh, share of nominal GDP. Okay, okay. All right. So it's about the same, roughly the same.
Ryan Sweet: Roughly the same.
Mark Zandi: Steal. Which is just, I wouldn't have said that. I should know that off the, but I... Would you have said that, Ryan?
Ryan Sweet: No, I was surprised.
Mark Zandi: Yeah, I was surprised.
Dan White: The one contribution that'll 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, at the 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 since 1993 in an absolute number. So in 1993, we had more state government employees outside of colleges than we have today.
Mark Zandi: Well, I think the pandemic did a number on K through 12, right? I mean getting, yeah.
Dan White: Right. So excluding K through 12, that's just state government. So these are your employees, and then.
Mark Zandi: State government.
Dan White: Yeah, just state government.
Mark Zandi: I see. Interesting.
Bill Glasgall: Well, 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.
Mark Zandi: Hey.
Dan White: That's a big opportunity though, Bill. Oh, I'm sorry to interrupt.
Mark Zandi: No, go ahead.
Dan White: That's a big opportunity, because what states are doing is now that they've got all this money from the federal government, the knock 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 one time cash. Now they've got all kinds of one time cash and it's a really great opportunity for them to change those processes and make them a lot more efficient than they've ever been.
Mark Zandi: Yeah, no. 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 during recessions and on the backside of recessions, early recovery state and local governments are kind of retrenching. They're pulling back. They're not adding to economic growth. In fact, obviously in the wake of the financial crisis, they were a big drag on economic growth coming out of that recession for the first part of that recovery. And what 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 I guess they're not subtracting from economic growth, is that narrative right? Roughly right? Do I have that right?
Dan White: Yeah, I mean if, 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 they're nominal numbers are up like seven or eight percent.
Bill Glasgall: That's a really, really important point. Budgets for, state budgets for fiscal 23, according to Nasbo, which is the state budget officers. So they have state budgets for 23 up about 1% at a fraction in nominal terms. So in real terms, state spending is really going backwards if I do my arithmetic. And where you see strong revenue collections in real terms, it's in sales taxes, because it's the sales taxes rise along with the goods prices. Income taxes are not going to be following inflation up, wage settle. Yeah.
Mark Zandi: So despite these extraordinarily good financial conditions, state and local governments are not adding to economic growth then 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? Or maybe what we're not picking up here is the tax cutting that some of the state and local governments are doing. 'Cause I'm looking just at the, I'm looking the kind of expenditure side. They could also be helping the economy out if they're cutting tax. Well, helping, I guess, depends on your prism given the high inflation. But do, anything to add there? 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?
Bill Glasgall: 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 dollar share of the state and local physical 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, the tax cut. A lot of the, 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 handing it back to you.
Mark Zandi: Okay, so.
Bill Glasgall: Might change.
Mark Zandi: So the good strong finances are the result of a few things, just to summarize, see, make sure I have it right. One is they kind of came into the pandemic in a pretty good spot financially. Second, they have been cautious in managing their finances, 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 local. Big chunk of that was for schools, like 150 billion were for K through 12 I believe. And then another 350 billion went basically checks cut to state and local governments. And they have through when 2026 to spend that or to use that money. Is that right?
Bill Glasgall: Right, from that, that's right. 2026. And there's some other school aid that expires in 2025. It's very important for New York City.
Mark Zandi: And then of course the economy's been strong broadly, and that's helped and 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. 'Cause people taking capital gains on the high realize, they're realizing the gains that they've accrued. So tax revenue's very strong. And then of course the inflation has been strong. So that adds to state and 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 going in the right direction for state and local governments unless they're current financial situation. Okay.
All right. Well, then let's turn to, So did I have that right? Did I get that right? You guys? Bill, Dan, did I miss anything? That feels about right. Okay. So we've talked about this a little bit, but what are they doing with all this cash or what are they have planned to do with all these resources going forward? Are we going to see state and local governments kind of become more of a contributor to broader economic growth, more jobs, more GDP, more support to the economy, Bill? Is that in train?
Bill Glasgall: I don't see state and local employment as a big engine of growth. Maybe Dan'll disagree with me. I think there's a lot of conservatism baked into this, the system here. Everybody's complaining, we have open positions. There was a survey of by the associated general contractors a few weeks ago, and every state they survey say, we don't have enough engineers. We don't have enough finance people, architects, ditch diggers, you name it. But they didn't have enough of these people before the pandemic either. So governments are making do with smaller workforces or smaller workforces per dollar of output, if you will. And I don't see there don't that changing.
New York City was a bit of an outlier, especially under the previous administration, added about 10% to the workforce. New York City was really flush. Now the city's got a rainy day 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, New York City, you've 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.
Mark Zandi: Right. What, Dan, what do you think state local government's going to do with all this financial resource that they have right now? Are they going to be, 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 rough? Is that roughly your view on how this is playing out?
Dan White: He's on the right track, but I think 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 money 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 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 Bill's 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 talked 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 salaries, not being able to add positions, not being able to do all these things. There's a lot of handcuffs that are around 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 where, what they've got to do.
Mark Zandi: You said hit to GDP. Did you mean add to GDP?
Dan White: Yeah, I'm sorry. It'd be a bump to GDP. There should be a bump to GDP.
Mark Zandi: A bump to GDP.
Cris deRitis: From them spending. Yeah.
Mark Zandi: 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 and local governments, unlike coming out of the financial crisis when they were a headwind, they're going to be a tailwind to economic growth.
Dan White: 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.
Mark Zandi: Yeah, and your broader other point is this is maybe a GDP thing. It's jobs are going to be a lot harder.
Dan White: Jobs are going to take forever. I mean, it took twice as long in the great recession for them to come back for state 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.
Mark Zandi: You know, Bill. It used to be the case before Dan joined me, I would get invited to all of these Nasbo, NGA, all these function, FTA. Now I don't get a call from any of them. They go right to Dan, which...
Dan White: They still love you, Mark.
Mark Zandi: No. Is that right?
Dan White: That's what they tell me. They say, tell Mark we still love him.
Mark Zandi: I need some love. I need some love. I get a call every once in a while.
Dan White: But they like me, because I think a budget officer. I have correctly predicted seven of the last two recessions. And that's exactly how they think and that's how they love, and they move it all.
Mark Zandi: That's the trick.
Dan White: You're just too optimistic for them. Yeah.
Mark Zandi: Oh man. You know what? I think that makes a lot of sense to me. Yeah, that makes a lot of sense.
Bill Glasgall: In a way, it doesn't matter that you predict the seven of the last two recessions. What matters is that you're doing stress tests. And what matters 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 months. There's about half the states don't look much beyond the end of their nose. They look at the fiscal year and then maybe one year out.
Mark Zandi: Yeah, Bill. Can I say if you keep talking like that, you're not going to get invited to any of these things any.
Bill Glasgall: No, no, no, no. I'm very happy to criticize and to praise the states like Utah or Maryland.
Mark Zandi: Okay, there, now he's sucking up. You see that? Now he's sucking up. He realized he went overboard.
Dan White: He's getting another shout out to Utah there.
Mark Zandi: He went, another shout out to, he wants to go to you.
Bill Glasgall: They're my friends.
Mark Zandi: He wants to go to Park City or something is.
Bill Glasgall: Not bad.
Mark Zandi: I can feel it.
Bill Glasgall: I'm just saying that.
Mark Zandi: I'm just teasing you, Bill.
Bill Glasgall: States and city, no. State states 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 the nose. They 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 a 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 going to, what might happen to revenues. And that's really, really important. And not enough states do this and should.
Mark Zandi: Yeah. Yeah. Makes sense. I just want to just end that conversation on the relationship between state law 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 you seem to, your answer, Dan, seemed to be labor saving technology investment. I got to improve productivity. I've got to do more, provide these services with fewer people. Is that the answer?
Dan White: This is a great economist answer, but it depends. 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 economists in the state budget office, that's different. That, you got to attract it. And where state and local governments are seeing for the last 25 years go down is that as all those pension issues have popped up, we've had to issue, we had to deal with not being able to offer as good benefits. The OPEB and the other post-employment benefits. And in 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.
Mark Zandi: Anything to add there, Bill, on the labor supply?
Bill Glasgall: And that's difficult. If we have a recession, what's your odds as of this taping?
Mark Zandi: Oh, here you're putting your...
Dan White: Hang on, Bill, you didn't ask me what was easy and you just said how do we fix it? It doesn't necessarily mean it's going to be easy.
Bill Glasgall: I fix it. I think it's going to be technology, higher salaries, higher compensation where 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. We want to make sure it's there.
Mark Zandi: Yeah. I want to come back to some of the challenges, longer term challenges the state and local governments face. But one other question I had was the infrastructure legislation passed at the federal level back last fall is going to provide a lot of funds for infrastructure projects. And that's starting to kick into gear I think in starting up now. But really in '23 and then particularly in '24, '25. Does that complicate things for states? Does that supplement or how does that, or is there any kind of relationship at all between that legislation and what state and local governments are going to be doing?
Bill Glasgall: I don't think it complicates it. Dan probably has the macro, right? Of that trillion dollars, about half of the trillion dollars in the infrastructure bill is half of that was the highway bill was already, it was spending that was pretty much already planned and continuing. So you're talking about spreading 500 billion. It's a big number, but over 10 years. A lot of states and cities are complaining that bridge that was going to cost me 200 billion is now costing me 300 billion. It may be that this money won't go as far but so 50 billion a year in a 20 trillion economy. I'll let you do the math.
Mark Zandi: Got it.
Bill Glasgall: And it'll be a marginal extra kick. A nice boost for jobs, a nice boost for the states to be sure. But I don't think this is going to be an ethical event
Mark Zandi: 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 and local governments, because they're the ones that are 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?
Dan White: Yes. Yeah, CBOs 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, who had, I hate to use that Great Recession, trouble ready thing again, but the 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 doing, Oh, here's an extra couple hundred million. What do we do with it? They're not going to see the same benefit.
Mark Zandi: Yeah. Okay. Let's turn 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 you 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 characterized it as a fiscal cliff. So I got all this cash, I got all this money, it's gone. So 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 fund ongoing spending or tax cuts that aren't triggered in any way. They're kind of there and what happens 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?
Dan White: Well, the problem that states are seeing is that state government budgets have started to look an awful like the federal budget and not in a good way. So more of the state budgets goes to Medicaid and other social benefit payment than ever has gone in the past. And the reason is that the inflation on those programs over the last 20, 30 years has gone at a much faster pace than 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 seeing. And it's 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.
Bill Glasgall: I agree. Medicaid has been increasing very steadily in real terms forever since the 1970s and taking up a bigger share of state spending as and as our society ages, it's 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 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 right now.
Mark Zandi: How much money is that, the COVID funding? Do you know? How big a deal is that, the special [inaudible 00:43:29].
Dan White: I can't remember the last numbers. It's like between 50 and 75 billion a year.
Mark Zandi: Oh. It is. Oh, it is. Oh, okay. It's consequential.
Dan White: Yeah.
Mark Zandi: Okay.
Dan White: 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 redeterminations on all of the people who came on to Medicaid during the pandemic. One of the strings attached to 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 got to do it in. It's a big fire drill that they're going to be dealing with a lot lately.
Mark Zandi: Okay.
Bill Glasgall: There's another wrinkle, non-Medicaid wrinkle, which is unemployment insurance. At the peak states owed about 52, 53 billion dollars. 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 dollars in loans outstanding. And 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 assessed, put a special assessment on employers that used that to use that to borrow through the bond market to pay that off.
So New York's, New York state's got a eight billion dollar mini fiscal cliff. That's a good share of the budget. California, 17 billion dollars. It's not quite the same as the rainy day fund, but there are taxes going up even now.
Mark Zandi: Right. Okay. So to add to the list, the issues around Medicaid that have been, they were long running, but exacerbated by the pandemic and the response to the pandemic and unemployment insurance, also [inaudible 00:46:20].
Dan White: See, Mark. This is why they like it is because we're always full of sunshine and rainbows all the time [inaudible 00:46:24].
Mark Zandi: Yeah. Well no, that's what I wanted. I was asking is there any other significant challenges? I'm sure there's 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 over the next few years?
Bill Glasgall: I think 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 through 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.
Mark Zandi: Right. Okay. Okay, so just to sum up from a macro, my kind of prism, the macroeconomic perspective, the way I'm landing based on the conversation is, 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 over the course of the next several years. Not a tailwind 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. Pension plan, pension underfunding would be an example of that. Some exacerbated by the pandemic, the UI program, the Medicaid program that would qualify and the expiration of the American rescue plan.
And so we've got some challenges down the road here, but for the time being for the next few years, we should get a bit of a economic tailwind from the state and local government. Is that fair? Is that a good characterization of the conversation, do you think?
Bill Glasgall: I think so. Yeah.
Mark Zandi: Bill. Okay.
Bill Glasgall: Yep. Yeah.
Mark Zandi: Dan. Okay. Okay, good. Cris and Ryan, you've been listening to the conversation. Where would you, we got a few more minutes left. Anything you'd want to push and press on and explore? Anything I missed that you'd like to ask Bill and Dan? Go to you, Cris, first.
Cris deRitis: Yeah, no, I think it was excellent summary of the current state in future states. Of the states. 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 take takeaways.
Mark Zandi: Yeah.
Cris deRitis: I took. And another one was that it sounds like we need a push in terms of, we talked 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 read that correctly or?
Dan White: Yeah, but to Bill's point, some of that improvement in efficiency is moving from the 18th century to 19th century. It's not like they're moving from 2010 to 2015. It, there's [inaudible 00:50:02].
Mark Zandi: You may not be invited back. Man, they're going to ask me back after that comment.
Dan White: Oh, they're they're going to be the first ones to say that.
Mark Zandi: Yeah. Right. Ryan, anything you want to?
Cris deRitis: Got the Googles and the Apples in there as well to make some infrastructure investments. Is that what you're saying?
Dan White: 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. 'Cause if you can't have more people, you've got to get more productive. There's no other way to do it.
Mark Zandi: Yeah. And Ryan, anything you wanted to press on or ask or?
Ryan Sweet: No, 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 six tenths of a percentage point.
Mark Zandi: Oh, really?
Ryan Sweet: In the discussion. I was wondering, I was like, man, maybe my recession odds are too high, but no.
Bill Glasgall: No. It's marginal.
Ryan Sweet: Yeah.
Dan White: But it always is. To Mark's point, coming out of a recession, they're always a tail, the government should be a tailwind because it's what was supporting the economy during the downturn. It should be.
Mark Zandi: Although, they, typically state and local government have, correct me again, just so you have this right, They are a headwind generally. They are pro-cyclical. They're not countercyclical like the federal government. That's my [inaudible 00:51:13]
Dan White: Yes. No, they should. Yeah, they should be drag. They should. I think we're getting our winds confused. They should be a drag on growth after the, should be a drag on growth after the recession. They should always be drag on growth.
Mark Zandi: You know, Dan, is it's flipping all these phrases. Hit means good. Bump means bad. I've got to get him on the podcast more often, so he gets.
Dan White: I've been hit in the head a lot, Mark. You got to give me some grace.
Mark Zandi: You got, I got it.
Cris deRitis: You got to watch out during the statistics game with Dan, right?
Mark Zandi: Oh, I know.
Cris deRitis: The pluses and minuses, right?
Mark Zandi: 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. And again, you've got the first edition of your podcast coming out on the Special Briefing podcast next Friday. Is that right?
Bill Glasgall: God willing. On Apple. Apple, Google, Spotify, and all the same wonderful podcast platforms you're probably on too.
Mark Zandi: Okay, well, I promise I'm going to tweet yours. You tweet mine, and we'll be good. Sound good?
Bill Glasgall: Absolutely. Absolutely.
Mark Zandi: Okay. And we'll have you, hopefully you'll be willing to come back on at some point in the future. And Ryan strives to be 49% right. So if you could just do 50, 51, you're golden. So just saying. Sorry Ryan, I had to get there. I mean, I have not ragged on you the entire podcast. I
Ryan Sweet: I know. This was a first.
Mark Zandi: 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.