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City Hall Fights Back
The skies have brightened over the
nation's city halls and state houses
in recent months, and present indi­
cations suggest that the state-local
fiscal situation will strengthen even
more as the year goes on. The main
reason, of course, is the increasingly
robust national economy, but
another important factor is the
budget-tightening activities of policy
makers who are trying mightily
to avoid the New York syndrome.
The situation is not yet comparable
to that of the early 1970’s, when
most state and local governments
recorded substantial surpluses as a
consequence of increased aid from
Washington, increased revenues
from their own tax boosts, and
decreased demand for certain serv­
ices such as primary education. In
the intervening years, governmen­
tal agencies went through the worst
recession and the worst inflation of
the past generation, and these
events forestalled a rapid return to
health.
For several years, state-local expend­
itures rose sharply because of the
impact of inflation on costs,
because of the demands of strong
public-employee unions for
inflation-offsetting wage increases,
and because of the recessionrelated rise in demand for local
services. Revenues meanwhile
failed to keep pace. Inflation re­
duced the real impact of the massive
$30-billion Federal revenue-sharing
program. Inflation also meant a loss
of revenue, in real terms, from that
half of the state-local tax structure
that generally responds slowly to
1



rising prices—primarily property
taxes and gasoline and liquor taxes.
Also, the recession slowdown in
employment and business activity
meant a slower flow of revenues
from income and sales taxes.
Improvement in ’75

Conditions improved significantly
in 1975, however, especially since
receipts increased by $23.0 billion
to $232.5 billion—a greater gain
than in any other year except 1972.
Almost one-half the increase came
from a sharp rise in Federal aid, due
largely to court-ordered releases of
impounded funds and higher
grants for public-service jobs and
income-maintenance programs.
The rest of the gain in receipts
mostly reflected the higher taxable
incomes generated by the business
recovery. Unlike the early years of
the decade, legislators imposed few
new or additional taxes. However,
many jurisdictions raised charges
for educational and health services
in an attempt to recover some of
the increased costs of hospitals and
higher-education facilities.
The growth of state-local spending
moderated somewhat in 1975, with
a $21.3-billion increase to $222.6
billion. This slowdown reflected the
reduced rate of inflation affecting
many important budget items, such
as fuel and electric power. In
addition, state-local employment
(except for Federally-financed
public-employment programs)
grew only 2.5 percent for the year,
as against a 4-percent gain in 1974.
Purchases of structures rose only 4
percent for the year, and in fact
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

stabilized somewhat after the 1973early 1974 boom. On the other
hand, the lingering recession in­
duced large increases in welfare
outlays, especially medical-vendor
payments and aid to families with
dependent children.
The results looked even better with
the second-half recovery period
considered separately. Because of
the business upturn, own-source
receipts (taxes and fees) rose at an
11.6- percent annual rate during the
second-half, compared with a 6.7percent rate of increase in the firsthalf of the year. Meanwhile, as
budgets tightened, employee com­
pensation rose at an 8.2-percent
rate in the second half, as against an
11.6- percent rate during the first
half-year. Consequently, state-local
operating budgets (exclusive of
social-insurance funds) shifted from
a $5.0-billion deficit to a $1.7-billion
surplus, at annual rates, between
the first and third quarters of the
year.

bond proposals have tended to
inhibit capital-spending plans. In
addition, the spending surge for
medical and other payments for
welfare recipients should slacken as
the economy improves further.
Employee compensation may pick
up, but at a relatively modest pace
because of still-straitened budgets.
Fears of excess spending will con­
tinue, of course, although a recent
study by the Congressional Budget
Office suggests that no other big
city is in as unfortunate a position as
New York in this regard. (The
analysis measures expenditure and
debt data for all local governments
serving the central county or coun­
ties in each major metropolitan
area.) The data show that per capita
government expenditures in 1972­
73 ranged from 17 percent lower
than New York (San Francisco) to 53
percent lower (Chicago), and that
per capita government debt ranged
from 17 percent below New York
(Boston) to 64 percent below
(Baltimore).

Moderate spending in ’76

The easier fiscal position should
persist as these budget trends
continue into 1976. According to a
recent Commerce Department
analysis, expenditure growth may
well continue to slacken. The
construction sector could weaken
for several reasons: the heavy 1973­
74 allocation of revenue-sharing
funds for construction has sharply
reduced the backlog of capital
projects, school construction has
declined along with the drop in the
school-age population, and
widespread voter rejections of
2




Larger receipts in ’76

The state-local receipts picture
looks generally favorable, begin­
ning with the continuation of heavy
Federal grants, which now account
for almost one-fourth of all statelocal receipts. The rise in grant
funds may be somewhat less than
last year's unprecedented $10.4
billion increase, in view of Con­
gress' tightening budget stance and
the slackening of recessioninduced demands. Consequently,
proposals for “ countercyclical" aid
to unemployment-impacted com-

munities may get short shrift in
Congressional committees. But
general revenue sharing, now the
centerpiece of the Federal grants
program, seems a certainty to
continue with perhaps $6.5 billion
earmarked for fiscal 1977.
Further increases in own-source
receipts may be expected as the
economy continues to recover.
Receipts in certain jurisdictions will
be boosted by tax increases
legislated either in 1975 or 1976,
although the general mood is just
the opposite of the tax-raising spirit
that dominated legislatures at the
beginning of this decade. Increases
in certain levies are probable,
especially gasoline taxes, but they
may be offset by reductions in
other state taxes or local property
taxes. Most legislatures will rely on
a recovering economy, plus a holdthe-line budget stance, to keep
their books in balance.
Borrowing boom

They will be helped by a continued
reliance on borrowing to finance
long-term projects. New municipal-

bond issues jumped 26 percent
above the 1972-74 average to $29.2
billion last year, and much to
everyone's surprise, a comparable
increase has been recorded to date
this year. The net increase in
funding may be less imposing
because of the record volume of
issues maturing this year—even
greater than in the 1974-75 period—
but a vast improvement in liquidity
is still likely because of the heavy
borrowing calendar.
The twin specters of New York City
and New York State will stalk the
halls of municipal office buildings
throughout the land, encouraging
state and local officials to make do
and to do without. Still, the overall
improvement in state-local financ­
ing, with operating budgets (in the
aggregate) now in surplus again
after several years of deficit,
suggests that many necessary
reforms have already been ac­
complished. But most of the credit,
in this as in so many other sectors of
the economy, must go to an
accelerating economy with a
decelerating rate of inflation.
William Burke

California Energy Study
Eleven economists from a variety of educational and research institutions present their
views on the energy problem in the report, “ California Energy: The Economic
Factors/’ which will be published in late April by the Federal Reserve Bank of San
Francisco. This publication is designed to provide information on the economic
aspects of energy usage and energy technology, with special emphasis on California
nuclear power.
Single copies of this publication may be obtained free upon request to the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San
Francisco, CA 94120. Phone (415) 544-2184. (Academic and nonprofit institutions may
obtain multiple copies by contacting this same office.)

3




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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Amount
Outstanding
4/07/76

Change
from
3/31/76

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)—total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)—total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits—total*
States and political subdivisions
Savings deposits
Other time deposits:):
Large negotiable CD's

87,871
65,156
1,468
22,788
19,484
10,739
10,088
12,627
89,374
25,674
377
61,649
6,144
25,690
27,241
12,320

+ 685
+ 295
+ 348
263
33
+
81
+ 371
+
19
+ 1,015
+ 1,279
+ 154
356
42
+
97
- 446
236

Weekly Averages
of Daily Figures

Week ended
4/07/76

Selected Assets and Liabilities
Large Commercial Banks

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free(+)/Net borrowed (-)
Federal Funds— Seven Large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales (-)
Transactions of U.S. security dealers
Net loans (+)/Net borrowings (-)

Change from
year ago
Dollar
Percent
+
+
+
+
+
+
+
+
-

1,542
933
525
1,491
236
891
2,523
48
3,857
1,301
180
2,058
482
6,030
2,415
4,058

Week ended
3/31/76

+
+
+
+
+
+
+
+
-

1.79
1.41
26.34
6.14
1.20
9.05
33.35
0.38
4.51
5.34
91.37
3.45
7.27
30.67
8.14
24.78

Comparable
year-ago period

21
1
20

20
0
20

+

62
0
62

+

812

+

599

+ 2,107

+

779

+

194

+ 1,184

-

■"Includes items not shown separately, individuals, partnerships and corporations.

Editorial comments may be addressed to the editor (William Burke) or to the author. . . .Information
on this and other publications can be obtained by calling or writing the Public Information Section,
Digitized for FR> era* ^eserve Bank San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.
Ae<E