Even before Covid-19 blew a hole in their budgets, many states and cities were only one modest downturn away from fiscal calamity. With unfunded pension liabilities looming, a decline in revenue was bound to push states and municipalities over the edge at some point. The only question was when; the pandemic gave us the answer.
Yet, while seemingly invincible places like New York City are now on life support, once-moribund areas are getting a second wind. In 2018, aging and depopulating Vermont was so desperate for new residents that it offered to pay workers $10,000 to move in and telecommute. Now, the state can hardly keep up with the population influx. Connecticut has faced similar population decline in recent years and has long been a poster child for fiscal mismanagement, but it may also be on the mend as residents flee New York City.
Population growth is a remedy for budget troubles. Newcomers bring in new revenue to paper over fiscal holes, which is why state and local governments are so hungry to entice them. But population growth is also fickle, and there will be less of it to spread around in the future. The Congressional Budget Office has consistently revised population projections down in recent years. In 2016, the CBO projected 388 million Americans in 2040; in 2019, it lowered that estimate to 375 million. The pandemic is likely to result in an even greater decline in births that will reverberate for decades, just as occurred after the Great Recession—and a century ago, after the 1918 influenza pandemic. As of this September, the CBO forecasts only 366 million Americans in 2040.
Slower population growth inevitably means that more places will face the kind of demographic declines experienced by Connecticut and Vermont in recent years. Indeed, population growth in several major American cities had stalled before Covid. Demographic trends turned downward in the three largest metropolitan areas—Chicago, Los Angeles, and New York—sometime around 2016 or 2017. True, cities need to adopt better policies to attract new residents, like less stringent zoning and improved transportation infrastructure, but demographics is to some extent a zero-sum game.
Hubris has led New York and Connecticut to plan for and rely on endless growth. Connecticut budgeted as if the good times would never end; the state faced a reckoning when the music stopped. Serendipity, not good government, has delivered Connecticut its temporary reprieve. If the state comes out of the current budget crisis stronger than its neighbors, it will only be through sheer luck. New York City’s luck lasted longer than Connecticut’s, but it now faces the same problem of high-earning residents fleeing. The city has been here before, of course, and it survived the budget crisis and high crime of the 1970s. The lesson, then, is certainly not one of inevitable decline, but the outlook isn’t rosy. Slowing population growth means that bad times are likely to be more frequent in the future.
The problem boils down to excessive optimism. The pension crisis now afflicting states like Illinois, New Jersey, and Connecticut was born in part from sanguine projections of market returns after the 2001 recession. Expecting and budgeting for continuous, uninterrupted population growth was also questionable, even in the best of times. To keep doing so would be reckless. Myopic state and local governments have an extensive history of massively underfunding their rainy-day funds. Worse, the thirst for growth often saddles places with long-term liabilities, such as infrastructure maintenance, that can only be funded by more growth. Adding unfunded pension liabilities to the mix creates a recipe for disaster. Today, even Sunbelt metropolises like Miami are starting to slow down.
Planning for rainy days is no longer a luxury. The one-off of the coronavirus pandemic may or may not justify a federal bailout, but states and municipalities can ill afford to rely on the feds to make them whole again in the next downturn. They will need to start with the simple but painful work of building up their stabilization funds and reducing their unfunded pension liabilities. Even more fundamentally, they will need to remove their dependence on exogenous growth for basic fiscal solvency. If they fail to do so, the resulting service cuts and tax increases could lead to long-lasting economic destabilization and even slower growth.
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