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Public-sector belt-tightening: thrift, or long-term drag on US economy?

Since June 2009, 504,000 jobs have been cut among municipal employees. Public-sector reductions at the local level have subtracted almost a quarter of a percentage point from annual GDP each of the past four years.

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"A lot of the private sector depends on the public sector," says Chris Hoene, director of research and innovation at the National League of Cities in Washington. "There are estimates that for every $3 spent at the municipal level, there is $1 in new private-sector activity."

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The presidential candidates have both made statements recently about public-sector employment and spending, offering divergent views. In a speech in June, President Obama lamented the cuts made by state and local governments. "These are teachers and cops and firefighters," he said. "Congress should pass a bill putting them back to work right now, giving help to the states so that those layoffs are not occurring."

But presumptive GOP nominee Mitt Romney paints Mr. Obama as a "big government" president intent on building up bureaucracies. If elected president, Mr. Romney says his approach would be to move federal programs to the states or the private sector where, he maintains, they can be run more efficiently. "And streamline everything that's left," he said in a speech May 15 in Iowa.

The government sector has lost 627,000 jobs since June 2009, according to the US Bureau of Labor Statistics (BLS). The bulk of the cuts – some 504,000 – has not been at the federal or state level, but among local workers.

Even when they are not bracing for layoffs, many employees in the public sector have gone years without a pay increase. In Arizona, state workers have not had pay raises for five years. Florida state employees have had their pay frozen for six straight years. And in California, where there have been no raises for two years, many state employees also took pay cuts through furloughs. This year, Gov. Jerry Brown (D) is seeking a temporary 5 percent pay cut from the workers.

Although state revenues have shown some signs of gradual recovery, they are not growing sufficiently to keep pace with the expenditures required by Medicaid, pensions and other obligations, according to a recent report by the State Budget Crisis Task Force. The task force was co-chaired by former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch.

"State tax bases have eroded and become more volatile; these developments are undermining fiscal sustainability," reads one conclusion in the report, which was issued in mid-July.

Municipal revenues aren't doing any better. According to a survey by the National League of Cities last September, such revenues have fallen for five straight years and are expected to continue shrinking this year.

When revenue falls, officials have to make tough choices. That's what is happening in Tampa, Fla., where Mayor Bob Buckhorn faces a $24 million gap in his 2012-13 budget.

"The problem is that we've cut all the low-hanging fruit," he says. "So I've asked every department to show me what happens if we have to cut by 5 percent, 10 percent, or 15 percent."

As Mr. Buckhorn found out, a 15 percent reduction would mean the elimination of 700 employees out of a base of 4,200. "That's pretty draconian. We're already cutting into the bone," the Democrat says.

Instead, Buckhorn is cutting another 5 percent. Among his moves: He won't fill 29 vacant positions. "If it hasn't been filled in six months, it's not mission critical," he says.

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