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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 u o jS u m s e M . ije jn • u o § 3 j o • epeA O N . o q e p i J jE M E H • E !U J O J !|E 3 . EU O ZU V • B>)SE| V @ © § n © in iji j f m ng« © 'o3spuBjj ue§ ZSL ON llWU3d aivd f 3D V lSO d s n iiv w ssvi3 isau 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>Ae<Eera* ^eserve Bank San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.
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