20 Takeaways from Outlook 2017

State and local governments have entered an era of even tighter budgets. What does the future hold?

ARTICLE | Feb 8, 2017

A Hard Look at the New Reality

State and local governments have entered an era of even tighter budgets. Tighter budgets will require jurisdictions to cut even more and to identify additional efficiencies and alternative revenue sources that can be used to finance critical infrastructure and health and human services (HHS). This new era will also be characterized by “sore-winner politics,” in which those in power will simply change the rules if they don't get their way, moving further away from accountability and democratic policies.

These are just two of the takeaways from Outlook 2017: State & Local Government Market Forecast, an annual, two-day event hosted by ICMA communications partner Governing magazine, which took place February 1-2 in Washington, D.C.  Outlook 2017 participants—including Governing writers, reporters, and editors plus state and local government officials and political and financial forecasters—examined the financial, social, and economic issues and trends that will define the public sector market for the coming decade and beyond.


Other takeaways from the discussions include:

  1. State and local governments are on different tracks as far as fiscal health, with states searching for financial work-arounds while cities look for additional sources of revenue. Uncertainties around the direction of the new administration add fuel to the economic/financial fire. 
  2. In more than half of jurisdictions, levels of service—including education—have not returned to pre-recession levels
  3. Two-thirds of state budgets go toward funding education and Medicaid.
  4. Some state and local governments learned their lesson after the 2008 recession and have replenished or even doubled their rainy day funds.
  5. More state and local governments are establishing evidence-based policies that require communities to demonstrate outcomes and progress against generally accepted standards before receiving funds. 
  6. State and local governments must address their third-world, third-rate infrastructure challenges. Creative infrastructure financing is springing up organically from within the states, although some governors have chosen to focus on this issue in the face of tax cuts. In the long run, it may not make sense to “fix on failure,” and state and local governments may find it’s preferable to replace rather than “fix” aging infrastructure systems.
  7. Sixty-four percent of the U.S. economy is based in cities. The mayors of those cities are the square pegs of politics, since they often hold the one and only office in which Democrats still dominate, which explains some of the economic schism between urban and rural communities. Constituents of urban mayors tend not to be supporters of the current administration. At the same time, the current administration can do enormous damage to cities—for example, gut transportation funding, since transit tends to be an urban issue. 
  8. The use of ballot measures as a political tool is on the rise. There were more ballot measures last year than in the past decade. Despite their appeal, these initiatives are not as strong as one might think. Legislatures can overturn them
  9. Political boycotts and the threat of economic loss can have an impact on/power over states. North Carolina, for example, experienced a significant loss in business after legislators passed “bathroom laws” that undermined the rights of the LGBTQ community. 
  10. Changes in the Affordable Care Act will come down squarely on counties. It is easy to cry “repeal and replace” but not so easy to figure out how to provide adequate services on the ground with fewer resources. There is some good news, as lately jurisdictions seem much more willing to work across government platforms to address mental health issues.
  11. Public health departments have been crushed since the recession. Thousands of employees were laid off, and only now are states starting to understand that they need to reinvest in mental health.
  12. Nearly 20% of county funds are spent on community health, and county jails are the biggest mental health providers. County jails have become the point of entry for HHS. Counties spend a lot on Medicaid, for example, Los Angeles County spends $5 billion annually. Consolidated city/counties pay the most. Despite having a huge stake in the game, counties are limited in how much money they can recoup.
  13. Many state and local governments have no idea who is being served by Medicaid, or why. Before governments can address key issues facing Medicaid recipients, governments need to understand what infrastructure systems are required to maintain information about the Medicaid population.
  14. As a result of the opioid/drug abuse crisis, many counties are seeing historically high caseloads that they cannot service without Medicaid. Some counties have seen a 300%-400% increase in caseloads, which continue to rise while many people continue to be significantly underemployed. In many rural areas, Medicaid is the largest health insurance provider.  One key to addressing these issues is finding adequate employment for residents and constituents.
  15. Jurisdictions need to understand alternatives to fixed-cost, block grant HHS financing, such as tiered funding, in which jurisdictions that do more are rewarded with more federal funding, and evidence-based practices, through which the federal government will say, “If you don’t use your federal dollars in a certain way, they’ll be reduced.”
  16. Counties face many multi-generational, systemic problems and need to reposition their organizations to rethink how the on-the-ground delivery system works. Siloed service delivery systems make it difficult to understand root challenges and solutions. Some large counties see funding challenges as opportunities for cultural change and have implemented a few sophisticated pilots involving the private sector, nonprofits, and other jurisdictions. The state of Utah and San Diego County have made real progress in this area, through discussions framed around ensuring the wellbeing of the entire community and not just users of services. What began as compassion and a commitment to outcomes is now looking more and more like a business approach.
  17. Despite some success, jurisdictions still struggle to share data freely across sectors because of myriad legislative and funding issues. As a consequence, huge opportunities to take data analytics to the next level and to generate funding streams across sectors such as health, transportation, housing, etc., may be missed.
  18. There's a connection between immigration and human services. In the very near future, those seeking entry into the United States might be told that if they need to access public benefits, such as the Supplemental Nutrition Assistance Program or SNAP, they will be denied entry. Or for anyone who has been in the country less than X number of years, the federal government might require that the cost of any public benefits be reimbursed.  
  19. Local governments need a new narrative around who’s using what public services. Some residents access services only once, while others are chronic customers. Jurisdictions need to constantly collect and review their data to figure out why people access services regularly and how. Those who access services aren’t always predictable nor local residents—the stereotype that it’s just the homeless population isn’t accurate. Yet public policy has not kept up with changes in demographics. 
  20. It’s important for state and local governments to figure out how to empower and engage people in the service-provision process. State and local governments must be much more purposeful when delivering services.

The bottom line for state and local governments? The next four to eight years, according to Outlook 2017 participants, will be interesting. The largest exemption in the tax code is employer healthcare, and in four years, 83 cents out of every dollar will go to Medicaid and interest on debt. Many infrastructure and HHS services will need to be deficit financed. Entitlements such as Medicare and pensions may become even bigger challenges, and funding at the federal level must become more sustainable.

In the meantime, keep your eye on April 28, when authorization to spend money expires. In other words, the reconciliation bill has to pass or we won’t even have a federal budget.

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