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Fiscal Doom for States? Are There Ways Out?

Neal Peirce / Aug 03 2012

For Release Sunday, August 5, 2012
© 2012 Washington Post Writers Group

Neal PeirceIt’s tough to see any daylight in the recent blue ribbon report on finances of the 50 state governments, issued by a task force headed by Paul Volcker, former chairman of the Federal Reserve, and Richard Ravitch, recently New York lieutenant governor and a chief author of New York City’s fiscal recovery plan of the 1970s.

State governments, they report, “are grappling with an unprecedented fiscal crisis” — exacerbated by the 2008 economic nosedive, the worst since the Great Depression. But it’s rooted as well in years of state capital-generated fiscal gimmickry: off-budget agencies, borrowing cash from future years’ budgets, underfunded retirement promises to public employees and more.

Even worse is likely to come, the Volcker-Ravitch State Budget Crisis Task Force reports. The U.S. economy is likely to grow sluggishly for years as it works off the excesses of the credit and real estate bubbles combined with slow job gains. The American population is aging fast; ranks of the elderly, which grew 13 percent in each of the last two decades, are projected to expand 30 to 35 percent this decade and again in the 2020s. That will mean a big, productive age cohort not just beyond work years, but simultaneously seeking health and other public benefits.

Next alarm factor: States’ pension funds are already seriously underfunded and unlikely to produce the high yields (6 to 7 percent yearly) predicted before the recession. Plus, states and localities, without any reserve funds for the purpose, have promised workers hundreds of billions of dollars worth of retirement health benefits.

Today Medicaid is states’ biggest budget challenge. The program has already surpassed state outlays for K-12 education and is likely to grow somewhere between 8.1 percent a year, if the health care reforms of the Affordable Care Act are implemented, and almost as rapidly, 6.6 percent yearly, if they aren’t.

Another massive hit could strike as early as next year: potentially massive cutbacks in federal aid to states and local governments as Washington finally starts to come to grip with its multitrillion-dollar deficits.

Possibly on the chopping block, if that happens are big chunks of today’s federal grants for schools and colleges, highway and transit support, community and regional development programs, housing assistance, pollution control and social service activities.

Altogether Washington’s grants to state and local governments tally more than $600 billion a year. If Washington reduces just 10 percent of that ($60 billion) in an overall budget deal, the cost per person could run $316 in New York, $179 in California, $180 in Illinois or $133 in Virginia. A typical state, to keep its budgets intact, might be obliged to more than double its corporate taxes, cut police and fire spending almost in half, or eliminate all spending on libraries, parks and recreation.

Even before all this, most states had serious budget dilemmas. Joblessness and lower personal incomes hit hard at their sales and income tax yields. States’ take from corporate taxes has been dramatically eroded by business lobbying and legal tax avoidance. Gas tax yields are cut by reduced motoring and rising fuel efficiency. States’ sales tax bases are further, and seriously, eroded by online transactions.

So what’s to be done? The task force suggests states create “rainy day” funds to get them through hard fiscal straits. In normal times, that would be a nice move, though one has to wonder how, in today’s fiscal hail storm, states will find ways to build surpluses for even tougher times.

Surprisingly, the report doesn’t point to one rich revenue potential: Expanding state sales taxes to the lucrative base of services that generally aren’t taxed today, from legal and financial counsel to newspaper and Internet advertising. In a “service economy,” where else should one look for new revenue?

There is a suggestion that states should unshackle local governments, which are facing their own fiscal crises, from the many limits that legislatures impose on local property taxes. The argument’s trenchant: If a community is willing to tax itself more for services it considers vital, what business is it of state legislators to stop it?

But the Ravitch-Volcker report’s overall conclusions are deeply pessimistic. Beyond familiar, temporary state cutbacks in recessions, the panel of experts detects “a willingness to ‘unbuild’ state government in a way that has not been done before.” Just one example: Serious cutbacks in money for court systems, with big delays in bringing cases to trial, which raising the specter of “justice delayed” as “justice denied.”

Is an “unbuilt” America inevitable? Let’s hope not. Efforts to keep school staffs intact, to stop deterioration of public hospitals and to move ahead with critical investments in infrastructure aren’t luxury or froth. Sure, all can be made more efficient. But they’re indispensable to our shared national future.

Neal Peirce’s e-mail is

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  1. Frank Keegan
    Posted August 3, 2012 at 6:45 pm | Permalink

    The Government Accountability Office warned two years ago this month that “States will steadily decline.”
    GAO-10-899, says emphatically:
    “… closing the fiscal gap over the next 50 years would require action to be taken today and maintained for each and every year going forward equivalent to a 12.3 percent reduction in state and local government current expenditures. Closing the fiscal gap through revenue increases would require action of a similar magnitude ….”
    Read more:
    The most recent update increased that to 12.7 percent. And GAO uses official data and assumptions, which are delusional at best.

  2. Darrell Marcy
    Posted August 3, 2012 at 11:48 pm | Permalink

    One thing even more indispensable to any nation’s success is enforceable contracts.

    In 2008-9 when we wondered why banks were still giving out million dollar pay and bonuses on taxpayer money, it was said: oh, they’re contracts, can’t touch them. Yet ever since then we hear most everybody say, break the retirement contracts with public employees.

    It sounds like the 1% taking care of itself, but the 99% are not entitled to the same consideration.

    (Oh, so what do you do? First, tax the 1% ’til they’re in the same boat with the 99%. Then raise taxes across the board to meet your debt obligations.)

  3. Posted August 5, 2012 at 3:44 pm | Permalink

    States and all govts – besides becoming more Libertarian in their operating modes – need to look to the Yellow Pages for service, instead of city/county/state employees. Sandy Springs, Georgia – Population 100,000 has 7 employees + its police and fire who are city employees… they contract out ALL other services to private companies…seems to be working fine…see the July 28 edition of The Economist page 24.

    Idea two…we could reduce police costs by ending drug prohibition. 80% of felony prisoners in this country are a result of prohibition…per my experience (and others) as a police detective.

  4. Allen E Neyman
    Posted August 8, 2012 at 10:27 am | Permalink

    But you never said the age of affluence is past. It is of course. Now like much of the rest of the world, we will live with less and find other ways to do better, rather than do more, and only if our vision sustains.

  5. Mary DeWolf
    Posted August 9, 2012 at 7:13 am | Permalink

    Drones, robots and computers plus heavy equipment have replaced millions of jobs forever. In the 1930’s I watched a short road being built for many, many days by many men with hand tools: picks and shovels. A work horse hauled boulders etc. on a drag (board next to the ground without wheels to prevent bumping the horse’s hind hooves).