State, local budget cuts undermine rural recovery

Budget challenges for state and local governments pose a serious threat to the revitalization of rural America, says a report from the Federal Reserve Bank of Kansas City. "Rural communities depend heavily on intergovernmental transfers from the states to provide local services. Many people in rural communities rely on the state or local government for their jobs and on Medicaid as a part of their income," write economist Alison Felix and bank Vice President Jason Henderson. "Thus, rural economies are highly susceptible to state budget shortfalls."

The writers say local governments in many rural areas have been insulated from state budget cuts because theior real-estate markets have remained strong, maintaining or increasing property-tax revenues, but "As state budget problems deepen, rural governments could suffer further from reduced intergovernmental transfers. Local governments receive, on average, 31 percent of their total revenue from state governments, making them sensitive to state budget cuts." Here's why:

Government cuts to the Medicaid program for the poor and disabled have more effect in rural America, where Medicaid accounts for a larger share of personal incomes. State and local government staff cuts also have a marked effect on rural areas where 14 percent of employment and 18 percent of earnings are accounted for by government jobs. (Kansas City Fed maps)

Such economic pressures will force rural governments to make tough decisions in the coming years, the economists predict. "Rural government authorities can choose to raise revenues, cut services, or improve efficiency of service delivery through consolidation, cooperation, or privatization," Felix and Henderson report. "Tough times present tough choices, but carefully crafted solutions may not only alleviate current fiscal strains but also create a more efficient service delivery system for rural America." (Read more)