Tuesday, January 12, 2010

Why the states are in worst shape than we realize

Stephen Goldsmith, the former mayor of Indianapolis, has a depressing article about the terrible shape that the states are in due to their unfunded liabilities, particularly public spending and pension plans that they agreed to during better economic times. Now they don't have the money and the federal government doesn't have enough so-called stimulus funds to cover the difference.
For a variety of reasons, however, today’s budget deficits are different. Government at all levels now faces an inescapable reality – the promises of public services exceed our ability to pay for them – and will do so regardless of when the recession ends. The steady increase in the quantity and cost of public services, coupled with the needs of an aging population and public pension costs have produced a long term, structural deficit.

Even before the crisis took hold, unfunded liabilities for state and local retirees topped $1.6 trillion.In Illinois alone future taxpayers are on the hook for over $80 billion for public employee pensions.
With the economy still in the toilet, they're not getting the revenues that they need to cover these expenses. And the Democratic health care plan will add in more mandates that will require more spending on top of the deficits they already have. In the past, states have used accounting gimmicks such as moving the start of the fiscal year by a day to disguise these shortfalls. There isn't a gimmick large enough to hide what we're facing now.
Rainy day funds are depleted. There is no low hanging fruit to be found to patch over these deficits. There are also no more big accounting tricks to stave off the day of reckoning, no way to play kick-the-can down the road for the next administration.

California, like the canary in the coal mine, is a harbinger of the nation’s fiscal future. In the past year, it has raised taxes by $12 billion and received $50 billion in stimulus dollars from the Federal government. Yet, this summer the state still had to issue IOU’s to its creditors. The latest projections have California staring up out of a $21 billion hole.

Even worse, the costs from our past threaten our future. The debt service required for retired public employee pensions and health care entitlements must be paid – so where do we get the money for roads, schools, and prisons?
As Goldsmith points out, the stimulus package allowed the states to keep up spending without making the tough, but necessary choices, in cutting all their spending commitments. He goes on to analyze other approaches that have been used to address their budgetary crises such as acquiring more debt, raising taxes, or making small cuts in budgets here and there and hoping that that will stem the budgetary decline.

The last thing we should do is continue more of the same ol', same ol' policies that have driven us to this impasse.