(Ieva Geneviciene)

If there’s one thing to blame for the mediocre state-level recovery, it’s this: jobs.

The nation has roughly recovered the jobs lost during the Great Recession, but the ones regained don’t pay as well as the ones lost. And, for that, you can largely blame state and local governments, says Daniel White, a senior economist with Moody’s Analytics. Low-wage and high-wage jobs are well above their pre-recession peak, but mid-wage jobs have not yet recovered, he said.

(Moody's) (Moody’s)

“And the biggest portion of  those jobs are state and local government jobs. Almost half a million state and local government jobs have not come back since the end of the recession,” White said in an interview before delivering a keynote address at a state and local market forecasting event hosted by Governing magazine.

The reason for the lackluster job growth is really just a symptom of a broader problem: states are being squeezed like never before.

State tax revenues are more volatile than ever before, White said. During the first decade of the 2000’s, they underperformed the overall economy for the first time ever, according to a Moody’s analysis. But not only was the Great Recession harder on state balance sheets than prior recessions, mandatory spending commitments—such as Medicaid and pension obligations—are increasingly crowding out spending on the kinds of things that create local jobs.

“The economic footprint of state and local governments has continued to shrink even as revenues and spending has come back,” White said.

And those restraining factors are unlikely to change anytime soon, he says. According to the Centers for Medicaid and Medicare Services’ own projections, state Medicaid spending will outpace tax revenues even when the benefits of Obamacare are factored in, as the chart below shows.

(Moody's)
(Moody’s)

States have made some progress in reforming—or at least beginning to reform—pensions, but Medicaid is a different problem, one states will need the federal government’s help for.

In the nearer term, Moody’s expects states to have a stable year, with the biggest source of risk being the federal government.

“The biggest thing that we’ll be keeping an eye on is how things are going here in Washington, because there is so much that states depend on Washington for. About a third of state revenues come from the federal government,” White said.

The assumption, however, is that spending going forward will be roughly in line with the current fiscal year, he added. But the more difficult the federal process, the lower Moody’s expects state spending levels for the year ahead, as anxiety drives them to make more fiscally conservative decisions.