State and local government weighed down by housing

I have been meaning to address the issue of State and local governments for some time, because during the boom they were flush with cash from property taxes. The obvious parallel is an expected shortfall during this downturn. One can expect local government bankruptcies as well as a cut in services like summer camp, trash collection, tree culling and so on.

After the housing bust-induced shortfalls come the layoffs. CNN Money has caught on to this aspect of the coming crisis in local government (where a huge pension problem also looms). They have said:

The latest hit to the economy could come from state houses and city halls across the nation, which are in their worst budget crisis in years.

With falling revenue from sales and income taxes, and property-tax declines looming, states, cities and towns have already laid off tens of thousands of government employees. Many expect more job cuts ahead as public officials struggle to balance their budgets.

The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year.

All but four states are set to begin their new fiscal years on July 1, which means that tough decisions will have to be made soon. Economists say that cutbacks in jobs and spending by local governments could be a major drag on the overall economy.
–CNN Money, 23 Jun 2008

This has political consequences as well. Obviously, with the July 1 deadline looming, we should expect to see a major uptick in unemployment as we head into fall (just in time for the post-convention electioneering.

Therefore, one should expect 4 economic issues to reach top billing. Along with inflation, oil prices, the housing bust, comes unemployment.

The Republicans have voiced opposition to extending unemployment benefits out to 9 months. In the face of this kind of expected data, this position may prove a political liability come November.

From an investment perspective, expect fallout in the municipal bond sector. Some municipal bonds will lose value as credit quality falls due a fall in receipts from stagnant income, property, sales and capital gains tax intakes.

Expect to see more on this issue as data becomes available.

Update: U.S. cities cut services, raid reserves on fuel cost, Reuters, 20 Jun 2008