Riding The Turbulent Economic Wave

By Zanetta Doyle, Digest Editor

The fragile U.S. economy is a major topic of discussion these days. As the United States gears up for a possible war with Iraq, and as economic pundits make their predictions about whether the economy is improving or getting worse, Americans cope with the everyday realities of an uncertain future. “Unresolved economic problems, specifically a hangover from the late 1990s investment bubble plus the need for families to rebuild their savings, are likely to keep U.S. growth below a three percent rate through the first quarter of 2003,” according to Tim O’Neill, President of the National Association for Business Economics and Executive Vice President/Chief Economist of BMO Financial Group.

According to the Bureau of Labor Statistics of the Department of Labor, the U.S. unemployment rate was six percent in November 2002, up 0.3 percent from October’s rate, and the highest since April 2002. A survey conducted by the Federal Reserve found U.S. business conditions to be “soft or sluggish,” “mixed,” showing “marginal improvement” or exhibiting “continued growth, but at a slower pace.” If this is the situation for America in general, then rural communities constantly struggling to survive economically, will most likely experience a greater effect of the nation’s economic challenges.

The Federal Reserve Bank of Kansas City’s Center for the Study of Rural America revealed that, while housing activity remains robust due to low mortgage rates, rural job growth stalled. In August 2002, job growth held steady at 0.8 percent below the previous year. Rural manufacturing activity remains weak; factory job levels remain 3.5 percent below a year ago; and though still above 2001 levels, government job growth has slowed as many state governments face severe budget deficits. (The Rural Economy at a Glance: A Monthly Summary of the Rural Nonfarm Economy, November 2002).

According to the National Governor’s Association (NGA), “states face the most dire fiscal situation since World War II.” The biannual report released by NGA and the National Association of State Budget Officers, The Fiscal Survey of States, concluded that many states have exhausted budget cuts and are drawing down rainy-day funds and the most difficult decisions still lay ahead. The report found that, despite the reduction in state spending, 37 states were forced to reduce their enacted budgets by about $12.8 billion in fiscal 2002, 15 states laid off employees, 13 states reorganized programs and 31 used various other methods. About mid-way through the current fiscal year, 23 states plan to reduce their net enacted budgets by more than $8.3 billion.

“The fiscal crisis is affecting states across the country,” said NGA Executive Director Raymond C. Scheppach. “This is a result of a convergence of four major factors that have battered almost every state budget to the point where there just are no easy choices left. The combination of long-run deterioration in state tax systems coupled with an explosion of health care costs are creating an imbalance between revenue and spending. To make matters worse we’ve had a collapse of capital gains tax revenues added to the overall loss of revenue attributable to slow economic growth.”

In a recent article in the National Association of Counties’ (NACo’s) publication County News, Larry Naake, Executive Director of NACo commented on the fiscal crisis facing counties. “It seems as though counties and the services we provide to our citizens are being squeezed by a giant four-sided vise. From the top, the pressure comes from federal budget deficits and cuts. From one side, we are being squeezed by the massive state fiscal crisis that has developed during the last few years. From the bottom, we are facing revenue shortfalls at the county level because of a weak economy that is affecting sales and business taxes and may soon cause a decline in property tax revenues. And, from the other side of the vise, we are being squeezed by the growing demands on local governments to be a domestic army in the War on Terrorism.” He continued, “Because state (and local) revenue growth lags behind the end of a recession by as much as 12 -18 months, state fiscal woes are expected to continue into FY03-04. Initial estimates are that states will have a $49 billion shortfall, although that may be low since California, on November 15 [2002], projected a $21.1 billion budget shortfall for 2003-04, which is higher than previously estimated.”

Lawmakers Offer Their Economic Solutions

On January 7, 2003, President Bush announced his proposed economic stimulus plan. The plan includes Personal Re-employment Accounts to provide unemployed workers with up to $3,000 to use for job training, child care, transportation, or other expenses associated with finding a new job.

The President’s plan would give states $3.6 billion to fund these accounts. It would also boost the tax write-off for new business investment and extend unemployment benefits that expired in December 2002.

The Democrats have a counter proposal, with $31 billion designated for state budgets. That figure includes the extension of unemployment benefits, as well as $10 billion designated for Medicaid. Over the coming weeks, Congress and the administration will work on a plan. The end result will have a great impact on state and local governments.

Where Does Rural Fit In?

Regional development organizations provide pertinent assistance to local governments, businesses and nonprofit organizations. Most receive funding for an array of programs from federal, state, local and private sources. While a few have taxing authority, most are dependent on federal, state and local grants, contracts and service fees.

According to a 2000 survey by the National Association of Development Organizations (NADO), 42 percent of regional development organizations’ budgets consist of federal funds and 21 percent comes from states. (Note: At Digest Press time, data from the 2002 survey was being compiled.) These statistics clearly show the dependence of regional organizations’ on federal and state funds, so the prospect of further cuts will present additional challenges.

“America’s rural communities and regional development organizations are already struggling in light of a faltering economy, strained state and local budgets and an ever increasing load of fiscal and programmatic responsibilities,” said Joe Brannan, President of NADO and Executive Director of the SouthEastern Arizona Governments Organization in Bisbee, Arizona. “Additional cuts on the federal level will undoubtedly add to a seemingly overwhelming burden faced by rural local governments and regional development organizations,” he added.

For more information: Visit the Bureau of Labor statistics at stats.bls.gov; the US Department of Labor at www.dol.gov; the Federal Reserve Bank of Kansas City at www.kc.frb.org; or the National Governors Association at www.nga.org; to access the complete outline of President Bush’s plan visit www.whitehouse.gov; to view the Democrat party’s proposed plan visit democraticleader.house.gov.

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