The typical analysis of state and local government finances is that they are primarily a function of the economy. When the economy is growing well, and especially when it is growing faster than expected, local and state government finances prosper. When the economy grows, more people are employed and employees have larger paychecks. State income and sales tax revenues increase. Property tax receipts go up because the price of housing increases. Irrespective of government policies–whether of the right or the left–a “rising tide lifts all boats,” or at least all government boats. Historically, the state of the economy usually has driven government tax revenues in good times and bad.
The conventional analysis may be changing–and in a way that may lead to unanticipated fiscal shortfalls in many state and local government agencies even in the coming, 2019-20, fiscal year. The first problem is that the stock market is headed lower. Though historically local and state government budgets have been mostly influenced by the economy, now the stock market may play as large, if not a larger, role.
Every public employee pension fund in the United States is actuarially unsound. Within California, CalPERS, CalSTRS, and the many county public employee pension plans all project continuing, year in and year out, returns on investment of approximately 7%. This means that the stock market would have to double every 10 years for already underfunded public employee pension funds to remain able to pay their guaranteed benefits.
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