The Great Recession: Impacts and Outlook for U.S. State and Local Finance

The Great Recession brought state and local government finances to a crossroads as revenues declined, budgets moved from surpluses to deficit, rainy day funds were depleted, and the resilience of federalism was brought into question. This paper establishes why there is a continuing national interest in maintaining a robust state and local sector and focuses on the performance of the main state and local revenue and expenditure systems up to and during the recession. The authors conclude that the system of state and local finance is unready to keep up with the nation’s demographic, economic, institutional, and technological trends and that although there are no easy answers to modernizing state/local finance, there are nevertheless good options and answers. The authors also conclude that state/local policymakers have a high interest in the reform of federal entitlement programs as well as in how the federal government will conduct countercyclical fiscal policy during the next recession.