![handle is hein.congrec/cbo8358 and id is 1 raw text is: A series of issuae summaries from
the Congressional Budget Office
DECEMBER 2010
Fiscal Stress Faced by Local Governments
Local governments-including counties, cities, towns,
school districts, and special districts-play a significant
role in people's lives and in the nation's economy.' In
2009, the expenditures of local governments equaled
8.7 percent of gross domestic product, and those govern-
ments employed just over 9 percent of the labor force.2
That year, local governments as a group cut their spend-
ing in real (inflation-adjusted) terms. This year and in
upcoming years, they expect to constrain spending and
services-primarily because of reductions in state aid and
falling revenues. In particular, revenues from property
taxes are poised to decline to reflect lower property values.
To the extent that local governments address budget gaps
by reducing spending or raising taxes, such changes will
partially counteract the federal government's fiscal sup-
port for the economy.
In light of those developments, this Congressional Bud-
get Office (CBO) issue brief describes the economic con-
ditions and budgeting practices that can lead to signifi-
cant budgetary challenges-often termed fiscal stress-at
the local level. The brief also reviews the options available
to local governments, state governments, and the federal
government for addressing such financial difficulty Last,
the brief examines two options that local governments
very rarely use: defaulting on their debt or filing for bank-
ruptcy.
1. Special districts include entities such as water, electric, sewer,
hospital, housing, and economic development districts.
2. Data on expenditures by local governments in 2009 the most
recent year for which such information is available-are from
Department of Commerce, Bureau of Economic Analysis,
National Income and Product Accounts, Table 3.21, 2009. Data
on employment are from Department of Commerce, Census
Bureau, Annual Survey of State and Local Government Employ-
ment and Payroll, Public Employment Data, Local Governments,
2009. Unless otherwise indicated, years referred to are calendar
years.
The Functions of Local Governments
and thc Composition of Their Bud]gets
Local governments vary considerably in size, purpose,
spending, and revenue sources. Currently, there are about
3,000 counties, 36,000 municipalities (cities, towns,
villages, and boroughs), 37,400 special districts, and
14,600 public school systems in the United States.
County and city governments are generally the largest,
both in the number of people they employ and in the
amounts they spend. They provide services such as police
protection, transportation, welfare payments, and job
training, among others. Special districts are generally the
smallest governmental entities and have a singular pur-
pose, such as providing water or treating waste. Collec-
tively, local governments spend more on education than
on any other category, followed by spending on social ser-
vices, housing, and transportation; administration and
interest on their debt; utilities; public safety; and the
environment (see Figure i).3
The sources of local revenues vary significantly depend-
ing on the type of local government. Although counties
and cities rely heavily on property and sales taxes, water
and sewer districts are funded mostly by utility fees and,
consequently, have experienced less fiscal stress than
counties and cities during the recent economic down-
turn. Collectively, local governments derive nearly one-
third of their revenues from state aid, about one-quarter
from property taxes, one-tenth from sales and other taxes,
and most of the remainder from fees and miscellaneous
revenues; only 4 percent represents direct aid from the
federal government (see Figure 2).
3. The environment category includes pa-rks and recreation, sewer-
age, solid waste management, and natural resources.](ViewImageLocal?handle=hein.congrec/cbo8358&div=1&collection=&method=preview&ext=.png&size=3)
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