The Twin-Transfer Squeeze on Rural Households and Governments in Virginia

Abstract

Federal, state and local government budgets are being strained during recovery from the deep recession of 20089. Revenues to governments fell dramatically as a result of employment losses and the collapse of the real estate market. Concurrently, automatic stabilizers combined with expansionary federal fiscal policy and increased outlays con tributed to a deepening federal budget deficit. State and local governments generally must balance their budgets, but many benefited from the American Recovery and Re investment Act of 2009 and its now-disappeared stimulus funding. Federal debt and solutions to it will place fiscal stress on all levels of government. Federal transfers of funds to state and local governments are already falling and many states are increasing local government responsibilities for program spending. Stress will also result from cuts in public transfer programs to households as the federal government struggles to reduce its debt burden. The “twin transfer” threat—concurrent cutbacks in transfers to households and to local governments—has particularly strong implications for rural communities. These communities are highly dependent on transfers of public funds and this dependence has grown over time. A confluence of long-term trends has created a perfect fis cal storm and rural localities are finding themselves at its center. Demographic changes such as aging and outmigration of younger workers leave remaining rural households more dependent on transfers. In general, and particularly in the Southeastern United States, rural economies have gradually diversified out of agriculture and manufactur ing, and steep cutbacks in manufacturing and construction employment during the recession created a jump in rural unemployment rates that will likely take a number of years to reduce. Rural communities are vulnerable to cuts in funding for social services, education, and infrastructure at the same time that local demands for these services are growing. Rural households are vulnerable to potential declines in transfer payments and, as a result, find themselves less able to pay for locally provided services. In today’s legislative climate, state governments are transferring funding responsibilities to local governments. In Virginia, local governments are increasingly responsible for funding employee retirement programs, state support for education spending is dwindling, and transportation funding is being taken from general fund revenues, implying fewer dollars for local governments.