Out of Control Policy Blog

Task Force Report Warns of Darkening Clouds for State Finances, Absent Reforms

An important new report this week by the State Budget Crisis Task Force—an independent panel of experts convened by former New York Lt. Gov. Richard Ravitch and former Federal Reserve Board Chair Paul Volcker—concludes that states are on an unsustainable fiscal path and will face a worsening fiscal storm absent major budget and policy reforms. Ravitch and Volcker created the task force "because of their growing concern about the long-term fiscal sustainability of the states and the persistent structural imbalance in state budgets, which was accelerated by the financial collapse of 2008."

There's little new information in the report for those that track state budget issues closely. Rather, it leverages the clout of authors to convey the seriousness of state fiscal crunch to a mass audience, and it synthesizes in one report a wide range of analyses of the major fiscal threats states continue to face. According to the report:

To understand the threats to fiscal sustainability, we examined six states - California, Illinois, New Jersey, New York, Texas, and Virginia—in depth. While all states are different, these states reflect important geographical and political differences within our country. They account for more than a third of the nation’s population and almost 40 cents of every dollar spent by state and local governments. All six states face major threats to their ability to provide basic services to the public, invest for the future, and care for the needy at a cost taxpayers will support.

While the study states differ along many dimensions, including politics, policies, economies, and demographics, they share many problems, including these six major fiscal threats:

• Medicaid Spending Growth Is Crowding Out Other Needs
• Federal Deficit Reduction Threatens State Economies and Budgets
• Underfunded Retirement Promises Create Risks for Future Budgets
• Narrow, Eroding Tax Bases and Volatile Tax Revenues Undermine State Finances
• Local Government Fiscal Stress Poses Challenges for States
• State Budget Laws and Practices Hinder Fiscal Stability and Mask Imbalances

These threats to fiscal sustainability create risks to essential state functions such as investments in education and infrastructure, and they affect the ways in which states are likely to issue debt. Addressing these threats will not be easy. States must address these threats through the budget process, which reflects each state’s own culture, institutions, and politics. The effort to achieve an annual or biennial balanced budget is a major political and governing event in the states, made by elected officials in an environment that breeds caution, encourages short-term budget- balancing contrivances, and discourages investment for the future.

The report goes into significant detail on each of these threats and is worth a read even for the well-initiated. For example, the "Underfunded Retirement Promises" section details the latest estimates on unfunded public employee pension liabilities and retiree health care plans, which tally in the trillions of dollars in aggregate. And the "Eroding Tax Bases" section covers a range of topics from the economic sensitivity of various types of taxes to the steadily erosion in motor fuel taxes that is increasingly limiting states' ability to invest in roads, bridges and other public infrastructure.

While the report devotes significant attention to the fiscal impact of federal deficit reduction on state and local governments, it also rightfully chastises state policymakers' use of gimmickry and budget "sleights-of-hand" to give the illusion of budget balance. Examples cited include delaying payment dates into future budget cycles, taking on debt to fund current operating expenses intend of financing long-term capital projects and more.

Last, the report makes an initial stab at some policy recommendations, including increased financial transparency, budget process reforms to replace cash-based-budgeting and enact multi-year budget forecasts, strengthening rainy day funds, reforming and increasing the transparency of pension systems, broadening the tax base and adopting multi-year capital budgets.

While these are useful ideas to consider as a start, the recommendations just begin to scratch the surface of what will really be necessary to put state budgets on a sustainable path. To supplement this report, I would also recommend that readers branch out further to check out additional works by independent groups, including this State Budget Reform Toolkit (a collaboration of many think tanks, including Reason Foundation), as well as the many ideas discussed over at www.statebudgetsolutions.org. And be sure to visit Reason's state budget policy archives to review our long-running work in this area.

Overall, the main takeaway from the Task Force report is a stark—and correct—warning:

The conclusion of the Task Force is unambiguous. The existing trajectory of state spending, taxation, and administrative practices cannot be sustained. The basic problem is not cyclical. It is structural.

The time to act is now.

The full report is available here, and a summary version is available here. For more details on this report, visit the task force website at www.statebudgetcrisis.org, and see the recent coverage by The New York Times, Governing and Stateline.org.

Leonard Gilroy is Director of Government Reform


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