State, city job cuts taint recovery

NEW YORK (CNNMoney.com) -- State and municipal worker layoffs are playing a bigger role in dragging down the economy, economists say, pointing to July national unemployment figures released Friday.

Public sector job losses, not counting government losses from temporary positions collecting federal census data, rose to 48,000 in July - the biggest loss in the sector in a year.

With so many states and cities facing budget crunches and running short on stimulus dollars to plug the holes, a new round of layoffs began to kick in July, when many governments begin their fiscal year.

"All of us knew that the municipal government funding is a ticking time bomb," said economist Robert Brusca of FAO Economics, who noted the impact of state worker losses on the national economy. "There's more pressure on municipalities rather than less. Putting a Band-Aid on the municipal economy makes sense."

The "Band-Aid" is proposed $26 billion legislation in Congress intended to avert more teacher, police officer and firefighter layoffs. The Senate approved the package on Wednesday and the House is returning from its summer break to approve the measure next week.

While the package will help, economists agree it's not near enough to stymie future layoffs in the public sector.

The grand total in budgetary gaps at state governments nationwide this year could reach $140 billion, according to research by Nicholas Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities. The center projects that, without any help, there will be a loss of nearly 900,000 jobs, including spillover losses in the private sector.

"It's pretty clear even with the $26 billion, you're still talking about public sector layoffs, particularly with teachers," said Ernie Goss, a labor economist at Creighton University in Omaha, Neb., who conducts three surveys each month of 15 states that consistently show economic weakness. "The recovery has definitely weakened."

Even Federal Reserve Board Chairman Ben Bernanke noted the impact state and local program cutbacks have had on the economy, suggesting in a speech earlier this week that "state finances will remain under pressure for some time."

With 49 of 50 states required by law to balance their budgets, states have no choice but to cut more spending and raise taxes, said Heidi Shierholz, a labor economist at the Economic Policy Institute.

"This is only beginning of the losses," she said.