CHICAGO - The Midwest economy should remain stable with slow growth during the current recovery, economists and rating agency officials said yesterday.
However, they said, Midwest governments face challenges in the future. The economic outlook panelists were speaking at The Bond Buyer's Midwest Public Finance Conference in Chicago.
"We believe the Great Lakes states will experience a positive economic cycle with relatively slow economic growth," said Todd Whitestone, a managing director at Standard & Poor's Corp. "But they are still faced with significant economic challenges."
Whitestone said the tax climate is "significantly worse than its been for some time" and that governments will be relying on "natural revenue growth" instead of tax increases to fund their needs.
Rebuilding financial balances and diversifying economies will be key for the governments in the future, he said.
David R. Allardice, a vice president and assistant director of research at the Federal Reserve Bank of Chicago, said that traditional government revenues may not grow fast enough to meet governments' needs.
He said governments may turn to "creative" revenue sources, such as user fees and gambling. He pointed to a recent proposal to increase Chicago's revenues by allowing riverboat casinos in the city.
"It's a strange way of raising revenues," Allardice said. "It raises questions in the future about the stability of the revenues."
He said that governments in the Midwest face pressures in the areas of education funding, Medicaid spending, prison construction, environmental clean-up, and property tax relief. Additionally, governments must balance capital spending to repair or replace crumbling infrastructure with operational needs, he said.
Diane Swonk, vice president and senior regional economist at First National Bank of Chicago, said she is "fairly bullish" on the economic prospects for the Midwest. She said the Midwest recovery, particularly in the auto industry, is helping to fuel the national recovery.
However, that strength is helping to fan inflation fears, which are leading to hikes in interest rates by the Federal Reserve, Swonk said.
"The prospect for the Midwest is extremely good. Manufacturing is the key, and [the Midwest] can ride the tide of interest rates better than the rest of the country," she said, pointing to the lower debt burdens of Midwest consumers and more affordable housing prices in the region.
George Pitt, a partner at the Chicago law firm of Katten Muchin & Zavis, and the chairman of the conference, also had an upbeat outlook for public finance. He said that over the last 30 years, state and local governments have been subject to "increasing complexity and regulation, and decreasing respect for their proper governmental role and function in a federal system.
"In spite of these impediments, states and local governments, including other local and regional public authorities and bodies, have been hothouses of creativity and experimentation in the mixing and matching of available assets, resources, and revenue streams in order to develop creditworthy financing structures for a variety of public enterprises," Pitt said.
He predicted that "principled simplicity" will emerge in the regulatory arena, along with "an appropriate and mutually respectful balance of federal and state governmental power."
