To force fiscal discipline down, states are reducing fund transfers to cities and towns. Real estate property taxes – a dominant source of local funding – are stressed by the declining property values making their way into reappraisal systems. Mark-to-market schemes had become ubiquitous as an automatic way to keep tax revenues rising.

Few leaders appear willing to take on what the financial press points to as the major factor in short and long-term fiscal imbalance – public sector compensation and benefits, especially pensions. Recent studies have shown the state and local government pension deficit is approaching $3000bn. Clearly, we can anticipate political rhetoric that reminds private sector workers (most of whom no longer have defined benefit pensions) that their state and local taxes are increasing largely to preserve the public sector’s more generous defined benefit pensions. Call it sector – not class – warfare.


Attacks on government employee benefits are not popular with the unions. So, even as some states try to move these obligations from state to local balance sheets, other states (and their unions) may find it more attractive to try to syndicate the problem nationally, as with the federal largesse to the United Auto Workers in the auto industry’s rescue.

For easily moved operations it may not matter much, but as investors deploy substantial funds ‘in the ground’ or amass significant and not easily relocated human capital, they give new consideration to state and local fiscal conditions, especially pension obligations. And if there is yet another federal rescue, meaning more taxation, there may be yet another reason for global deployment.

Daniel Malachuk works with business and government leaders on global direct investment strategies. He has advised many of the world’s leading companies and served in the public sector as director of White House operations.