State and Local Budgets the Day after it Rained: Why is the Surplus So High?

Abstract

WhyI s t he Surplus So High?READERS of the financial press will be shocked to find that, in the aggregate, the 78,000 state and local governments in this country are running a hefty budget surplus.These governments had a combined budget surplus of $29.2 billion in 1977, by far the largest ever recorded, and in part offsetting the impact of the one government most noticeably not in surplus (the federal deficit was $49.6 billion in that year).The rise in the state and local surplus has been exceedingly dramatic: at its recession low in the first quarter of 1975 it was $3.7 billion; by the third quarter of 1977 it had risen to $32.9 billion, accounting for over one-third of the national rise in gross saving over this two-year period.Such large changes in the saving behavior of any sector are interesting in their own right, and they have important macroeconomic implications for short-run stabilization policies and long-run growth.In this report I examine both matters.I first disaggregate the budgetary numbers to explore separately movements in the surplus of state and local pension funds and general governments on both current and capital accounts.I then estimate some time-series equations explaining state and local budgetary magnitudes up to 1974, making out-of-sample extrapolations of these