State and local governments have to get health and pension costs under control, Federal Reserve Board Chairman Ben Bernanke said at a Citizens Budget Commission event.
The commission was holding a dinner in a New York at a time when the New York state government is raising taxes and slashing budgets to cope with shortfalls.
Bernanke told attendees that the recession cut state government tax revenue about 12% between 2008 and 2009, and that tax revenue was up only 3% during the first 9 months of 2010.
Local government tax revenue held up better, but local governments could see their revenue drop, too, as a result of the effects of the real estate slump on property tax revenue, Bernanke said.
Meanwhile, as revenue has fallen, the recession has increased the demand for many government programs, such as Medicaid, Bernanke said. He pointed out that Medicaid caseloads rose to about 50 million in June 2010, from 43 million in December 2007.
State and local governments have responded by laying off or furloughing workers, freezing salaries, and raising taxes, and “continued evidence that states and localities are addressing fiscal shortfalls should help calm the municipal bond market,” Bernanke said.
Despite some turmoil at the beginning of the year, “generally, that market seems to be functioning reasonably well,” Bernanke said.
IN THE LONG RUN
Bernanke warned against the temptation to try to improve state and local government finances by cutting spending on education.