The State Budget Crisis Task Force weighs in

July 18, 2012

Much as the Simpson-Bowles report aspired to be the foremost guide to reducing the federal deficit, the Volcker-Ravitch report on the state budget crisis that was released yesterday hopes to serve a similar purpose for state government spending. Paul Volcker, the former Fed chairman, and Richard Ravitch, who helped New York City work itself out of bankruptcy, led the State Budget Crisis Task Force, the group that produced this report. The task force also included two former U.S. Treasury Secretaries as members. The bottom line of the report is that there is less money to go around and that states should become better managers of the shrinking economic pie:

The United States Constitution leaves to states the responsibility for most domestic governmental functions: states and their localities largely finance and build public infrastructure, educate our children, maintain public safety, and implement the social safety net. State and local governments spend $2.5 trillion annually and employ over 19 million workers – 15 percent of the national total and 6 times as many workers as the federal government…

…States are grappling with unprecedented fiscal crises. Even before the 2008 financial collapse, many states faced long-term structural problems. Many economists believe that in the aftermath of the crisis, the economy will grow sluggishly for years as it works off the excesses of the credit and real estate bubbles and endures slow employment growth. Tax revenues are recovering slowly and remain well below their pre-crisis trends.

Basically states, once flush with revenues, have overpromised benefits to their retirees, set aside too little in reserves to cover their liabilities, mismanaged their books and sat idly by while their tax base eroded as a result of changes in consumer behavior. The two big issues for state budgets are public pensions and Medicaid, both of which are somewhat out of the states’ control. Although states assume about half the cost of Medicaid, decisions about the program are made at the federal level. States must apply to Washington for an exemption to make changes to their program. Pension benefits are enshrined in contracts and are generally governed by a state’s constitution. Making changes to pensions, outside of bankruptcy, is either impossible or would require constitutional amendments.

The report is a landmark for recognizing that the decades-long expansion of state and local governments must come to an end. Harsh economic conditions have collided with gross structural imbalances, and the report highlights the dimensions of the wreckage.

If you are a muniland watcher, you know that the report’s recommendations are much too idealistic for most states to adopt verbatim. The messy business of state politics generally trumps common sense as politicians who hope to get re-elected tend to resort to bestowing public largesse on special interest groups. Few state politicians have successfully stayed in office with a platform of downsizing government or going after public-worker benefits. This report is an attempt to persuade the public to support, or at least not actively resist, the fiscal downsizing that state and local governments must endure.

Governors, mayors, state legislatures and city councils fight these battles every day as they contend with unsteady and shrinking revenues and increasing demand for services. It’s the wider public that has had little understanding of the depth of these problems. Voters will face two choices: reduced services or increased taxes. Having an understanding of what the problems are is helpful, but hard decisions lie ahead.

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