Special Briefing: 2022 Outlook for States and Cities

States and localities start 2022 fortified against the rising risks of inflation, higher interest rates, and the looming fiscal cliff when federal pandemic budgetary aid runs out by 2026, according to panelists at the year's first Special Briefing webinar, produced by the Volcker Alliance and Penn Institute for Urban Research.

"When the pandemic started spreading across the nation, everyone was expecting that we would see steep declines in state and local government tax revenues," said Lucy Dadayan, senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute.

"Nearly two years into the pandemic, we are seeing the opposite. We are seeing state and local government tax revenue rebounding and showing really strong growth."

Increases in stock market and residential real estate prices and a shift in consumer spending from services to goods subject to sales taxes have lifted state and local revenue and helped governments build rainy day funds, panelists at the briefing said. The increased reserves may help governments offset the impact of the scheduled cessation of American Rescue Plan Act emergency budgetary funding in 2024-26. “Federal pandemic aid does provide a pretty important fiscal cushion," said. Eric Kim, senior director and head of the US states rating team at Fitch Ratings. "Most of that $350 billion in American Rescue Plan money hasn't actually been spent yet."

In addition, states and municipalities will be buoyed by $1.2 trillion of recently enacted federal infrastructure funds to help overcome infrastructure deficits over the next ten years, especially if they are able to amplify the infusion via borrowing relatively inexpensively in the $4 trillion municipal bond market.  

The January webinar, Special Briefing: 2022 Outlook for State and Cities, was the twenty-seventh in a series of sixty-minute online conversations featuring experts from the Volcker Alliance’s and Penn IUR’s national research networks,, including leading academics, economists, and fiscal policy analysts. The discussion was moderated by William Glasgall, Senior Director, Public Finance, at the Volcker Alliance, and Penn IUR Co-Director Susan Wachter.

Economists on the panel said they expect growth in the US economy to resume as the spike in infections from the Omicron variant of COVID-19 recedes. "The expectation is omicron will eventually burn out," said Torsten Slok, chief economist at Apollo Global Management. "We should expect to see growth in consumer spending pick up again over coming quarters. We should see cap-ex spending increase in coming quarters. Broadly speaking we should see the economy come back in the coming six to twelve months."

Mark Zandi, chief economist at Moody's Analytics, said the US will grow 4 percent this year and the Federal Reserve will raise the Federal Funds rate four times in 2022, to 1 percent. The yield on ten-year US Treasury securities will rise to 2.5 percent by yearend, from 1.86 percent on January 20. Inflation, he said, will retreat from the current rate of about 7 percent to 2.25 percent by the middle of next year.

Zandi said he believes that the current surge in inflation is driven by COVID-19, and that pandemic-related supply chain bottlenecks should ease as businesses learn how manage through future pandemic waves.  "If I'm wrong, it will be because the pandemic is more disruptive” than he anticipates, Zandi said. In that case, the potential for a recession by 2023 is "not inconsequential and should be considered in people's planning."

Other risks to states and localities, Kim said, include increasing wage pressures, and a reversal in markets, which would increase governments’ pension funding burden. Indeed, the switch from offices to remote work may exert particular pressure on urban centers, which are more dependent on commercial property taxes. If that trend continues, "New York City's got a world of hurt dead ahead,” Zandi said.

Despite worries over cities losing office workers and tax revenue, however, “for the most part, states are very well positioned, Kim said. Revenue dropped when the pandemic hit, but "states were able to manage fairly well though that because they came in with solid reserves and lots of budgetary flexibility," Kim said. Some states are now in a better position than before the pandemic. "Pennsylvania, for example, ended with a nearly $3 billion surplus in 2021, and they put most of that into reserves. They didn't really have reserves before that."

Many counties, too, are expected to continue growing. Larry Johnson, president of the National Association of Counties and a member of the DeKalb, Georgia, Board of Commissioners, contrasted his county's current strength to the budget pressures it experienced when real estate values collapsed during the Great Recession. "Today we have a $125 million cash reserve ready to help us as we deal the throes of life and recessions," he said.