State and local governments were hit especially hard by the recession. Declining economic activity, he said, has meant declining tax receipts. State general fund revenue in fiscal year 2010 is projected to be 10.6% below its level in 2008.

From 2008 to 2010, sales tax revenue is expected to fall by 7.3%, income tax revenue to fall by 14.3%, and corporate tax revenue to be down 23.7%. Local governments also saw a decline in revenue, as depressed markets for housing and commercial real estate cut into property tax receipts.

Moreover, he added, movements in state and local government revenues typically lag behind movements in federal revenues during both recessions and recoveries, partly because states are more dependent on sales tax revenue and spending patterns adjust more slowly than income. Therefore, while the administration forecasts a robust increase in federal revenue of almost 14% in 2011, state receipts are projected to rise only around 3% next year.

Therefore, declining revenues, combined with balanced budget requirements, have forced states to tighten their belts. Overall, state general fund spending in 2010 was more than 10% below its level in 2008. But, the National Association of State Budget Officers has still estimated that states collectively are facing budget deficits of over USD62bn in 2011 and over USD53bn in 2012.

However, he pointed to the actions the federal government has taken to stimulate a recovery in the economy and increase jobs. In particular, the Recovery Act delivered tax cuts for businesses and households, while it also provided USD135bn in direct aid to help states retain teachers and cope with expanded demand for Medicaid services. The states, he said, are critical partners in making the Recovery Act work.

Krueger also included mention of the new tool for municipal financing, called Build America Bonds (BABs), introduced by the Recovery Act. BABs are taxable bonds for which Treasury pays a 35% direct subsidy to the issuer to reduce borrowing costs. They can be issued until the end of 2010. Between the program launch on April 2009 and July 2010, there have been over USD122bn of BABs issued, which represented about 20% of the total municipal bond issuance during that time.

He re-confirmed that the federal government is committed to assisting state and local governments as much as possible as the economic recovery progresses, as “doing so is good for the economy and good public policy.”