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READERS of the financial press will be shocked to find that, in the aggregate, the 78,000 state and local governments in this country are running a hefty budget surplus. These governments had a combined budget surplus of $29.2 billion in 1977, by far the largest ever recorded, and in part offsetting the impact of the one government most noticeably not in surplus (the federal deficit was $49.6 billion in that year). The rise in the state and local surplus has been exceedingly dramatic: at its recession low in the first quarter of 1975 it was $3.7 billion; by the third quarter of 1977 it had risen to $32.9 billion, accounting for over one-third of the national rise in gross saving over this two-year period. Such large changes in the saving behavior of any sector are interesting in their own right, and they have important macroeconomic implications for short-run stabilization policies and long-run growth. In this report I examine both matters. I first disaggregate the budgetary numbers to explore separately movements in the surplus of state and local pension funds and general governments on both current and capital accounts. I then estimate some time-series equations explaining state and local budgetary magnitudes up to 1974, making out-of-sample extrapolations of these

State and Local Budgets the Day after it Rained: Why is the Surplus So High?