Top 5 Expanded: Fiscal and Economic Development

Jennifer Burnett, Program Manager for Fiscal and Economic Development Policy, outlines the top five issues in fiscal and economic development policy for 2015,  including job creations strategies, state innovations in health care spending, public pension solvency, and federal funding uncertainty. 

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TOP FIVE FISCAL AND ECONOMIC DEVELOPMENT TRENDS IN 2015

  1. Paving the Way for Job Creation: More Than a Numbers Game
  2. Balancing the Recovery: Preparing for the Next Crisis
  3. Federal Instability: What it Means for States
  4. The Fiscal Impact of Health Care: State Innovation Leads Way
  5. Public Pensions: A Continuing Conversation

1. Paving the Way for Jobs Creation: More Than a Numbers Game

States are finally starting to see their economies recover after the Great Recession. The national unemployment rate has fallen below 6 percent; no state has an unemployment rate over 8 percent. Total employment rose by nearly a quarter of a million jobs in September 2014 alone.

Bill McBride, a finance and economic blogger who was one of the first to warn about the housing bubble in the 2000s and predict the impending economic collapse, is optimistic. “Right now, 2014 is on pace to be the best year for both total and private sector job growth since 1999,” McBride said in a recent post to his blog, Calculated Risk.

But labeling the economic recovery a success is tricky.

Although the country has regained all the 8.7 million jobs lost during the Great Recession, the jobs created aren’t equal to those lost. According to the U.S. Conference of Mayors, the average annual wage for jobs lost in the recession was $61,637, but the average wage for the jobs added through the second quarter of 2014 was $47,171. That’s a 23 percent drop, representing $93 billion in lost wages.

The National Employment Law Project notes there are now nearly 1 million fewer jobs in mid-wage industries than at the start of the recession. In addition, low labor force participation rates and elevated levels of underemployment persist.

With figures like these, state leaders in 2015 will be looking for ways to encourage job creation that is more than just moving the statistical needle. They will be looking for innovative ways to bring the public and private sectors together to create an environment conducive to entrepreneurial investment, a crucial ingredient to job growth.

Another key component to improving economic growth will be a focus on international business—both bringing international investment to states and equipping domestic companies with the skills needed to export their goods and services.

2. Balancing the Recovery: Preparing for the Next Crisis
States have emerged from the recent fiscal crisis, but with recovery comes a set of new questions about fiscal direction: Should we shore up our savings or restore spending? As the fiscal crisis made clear, state rainy day funds were largely inadequate to overcome budgetary shortfalls, leading to cuts in essential programs like education and layoffs in the public workforce.

State leaders in 2015 will be re-evaluating investment in rainy day funds, strategies to reduce budgetary instability in the future from volatile revenue streams, long-term costs related to public pensions and public retiree health care costs, and strengthening tax schemes.

In 2014, the Pew Charitable Trusts published "Building State Rainy Day Funds: Policies to Harness Revenue Volatility, Stabilize Budgets, and Strengthen Reserves," written to help policymakers prepare for the next economic downturn by explaining the ways states can better design their rainy day funds. The report also found that state rainy day funds have signficant room for improvement:

  • At the beginning of the recession, states only had about half the reserve funding on hand needed to effectively address budget gaps. 
  • Only a 12 states link the rules for when, how, and how much to deposit into their budget stabilization funds with underlying revenue or economic fluctuation.
  • 37 states have fixed caps for their rainy day funds, which can prevent them from saving enough to substantially offset revenue losses in a downturn. 

Along with conversations about strategies for future stability, state leaders will be looking at restoring some of the areas that saw budget cuts in the past, including renewed investment in infrastructure and education, both of which are essential ingredients to successful workforce development strategies.

3. Federal Instability: Shifting Costs
The 2014 midterm elections ushered in a Republican majority in both houses of Congress, which sets the stage for a more fiscally conservative approach in the federal government and increases the likelihood for the kind of political showdowns that led to the government shutdown in 2013. States will be faced with tightened federal purse strings and political instability; that could shift costs for some programs to states and localities. Taxation issues of significant concern to states’ bottom lines—like the Marketplace Fairness Act—now are more unlikely to pass, which could mean states will need to raise taxes to offset those losses. State leaders also may be less likely to take advantage of federal funds for programs that are matched with state dollars if they believe those funds will be withdrawn in the future, leaving them holding the bag.

4. Health Care: State Innovation Leads the Way
Medicaid spending is now the largest single component of state spending, accounting for nearly a quarter of total state expenditures, according to the National Association of State Budget Officers. Because health care will continue to be such a substantial part of spending, states will invest more resources in 2015 for testing innovative models designed to efficiently deliver health care services to residents while keeping costs low by placing a bigger emphasis on evidence-based strategies. Increased health care spending has an impact on the workforce development landscape as well. In the six post-recession years, health care added 2.1 million jobs to the economy, more than the next three industries—leisure and hospitality, professional services and education—combined.

5. Public Pensions and Retiree Health Care
As overall economic conditions have improved and states have taken on tough reforms, the solvency of public pensions has improved. But public pension solvency remains a key concern for state leaders and will continue to be a major topic for 2015. State leaders will continue to focus on the funding levels and stability of public pensions, including reconsidering investment return assumptions, which came under scrutiny in recent years. Further reforms to programs will continue to be discussed, particularly the amount current and future employees must contribute, how those pensions are structured and cost-of-living adjustments for current retirees.

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