Entries in State Budgets (4)


Top Six States Facing Major Financial Stress

iStockphoto/Thinkstock(WASHINGTON) -- A new report by the State Budget Crisis Task Force paints a chilling picture of what's ahead for U.S. states, even long after the 2008 recession officially ended.

The pessimistic analysis identifies major threats to fiscal sustainability, including out-of-control Medicaid spending; reductions in federal state-aid; underfunded state retirement plans; an eroding tax base; and laws that allow states to use gimmicks to hide their fiscal troubles.

The co-chairs of the Task Force -- former Fed chairman Paul Volker and former New York State Lieutenant Governor Richard Ravitch -- say state governments are coping with the "unprecedented challenges" in their attempt to keep providing "established levels of service with uncertain and constrained resources."  States' ability to continue to meet their obligations to their own employees, to their creditors and to their citizens, say the chairmen, "is threatened."

The report's recommendations include the following:

  • Reduce budget gimmickry.  States should, for example, replace cash-based budgeting with modified accrual budgets, so that legislators and the public can see how revenues earned in any given fiscal year relate to obligations incurred in the same year.
  • Enact forecasts and plans that extend at least four years into the future; encourage independent review of these forecasts.
  • Strengthen state 'rainy-day' funds.  Examples of successful funds, such as those created by Texas and Virginia, should be copied by other states.
  • State pension systems need to account more clearly for the risks they assume and for the potential shortfalls they face.  States should create mechanisms to ensure that required contributions are paid.
  • The federal government should shore up states' eroding tax bases by making it easier for states to collect taxes on goods and services sold over the Internet.

The report examines in particular the health of six states -- California, Illinois, New Jersey, New York, Texas and Virginia -- because, say its authors, these account for more than a third of the nation's population and almost 40 cents out of every dollar spent by state and local government.

Here's a sampling of the challenges facing these six states, which the report says face major threats to their ability to provide basic services:

1. Illinois -- Medicaid Spending
Medicaid, says the report, is the single biggest spending category in most states' budgets and is growing faster than both the economy and state tax revenues.  If trends of the past decade continue, the gap between Medicaid spending and state tax revenue growth will increase by at least $22 billion annually within five years.  Illinois, by the end of the current year, will face accumulated unpaid Medicaid bills estimated to total $1.9 billion.

2. New York -- Reduced Federal Aid to States
When the federal government gets around to taking significant steps to reduce its budget deficit, predicts the report, "such action could wreak havoc on the states."  Even a 10 percent cut in federal aid would cost states a collective $60 billion, the equivalent of eliminating all states' spending on libraries, parks and recreation.  Such a cut would cost New York and California more than $6 billion each, but New York's cut per capita ($316.5) would be highest of any of the six states.

3. California -- Underfunded Retirement
Under current actuarial assumptions, says the report, state and local government pension funds are underfunded by approximately $1 trillion.  Despite that shortfall, California and other states have continued to sweeten pension benefits, some retroactively, on the basis of assumptions that in hindsight were too optimistic.  California's unfunded liability, based on the current market value of its fund's assets, is greatest of the six states: $135.8 billion.  Illinois is next, at $92.5 billion.

4. Texas -- Eroding Tax Base
The report calls states' sales tax revenues "volatile and eroding."  Reasons include a nationwide shift in consumer spending away from goods toward more lightly-taxed services.  An increase in cars' fuel efficiency has reduced revenue from fuel taxes.  Texas' situation is complicated by the fact that it has no income tax, and so relies "far more heavily" on the sales taxes than do most states.  Sales taxes, says the report, have been diminishing relative to the economy.  "A 1 percent change in personal income now produces only about an estimated 0.7-0.8 percent increase in sales tax revenue," the report says.

5. Virginia -- Local Government Fiscal Stress
"Fiscal stress rolls downhill," says the report.  Suffering states have tried to pass their troubles down to cities, towns and counties -- for example, by cutting aid to primary and secondary education.  Such moves, however, result in no net reduction of a state's fiscal stress: The pea is just hidden under a different walnut-shell.  While laws in some states prevent local governments from raising property tax rates to offset those housing-bust declines in value, Virginia's towns and cities can raise taxes all they want, and some are doing so.  What good is achieved?  Says the report: "This kind of compensating mechanism only turns potential stress for local governments into actual stress for property owners."

6. New Jersey -- Laws and Practices That Hinder Fiscal Stability

Short-term budget gimmicks, says the report, only serve to destabilize a state's long-term finances.  One of the most notorious gimmicks, it says, is capitalizing future revenues to produce a balance in a current year, borrowing cash "not just from the year ahead but from many years into the future."  An obvious way to end the practice is to put in place "a multi-year financial and capital plan linked to the annual budgeting process."  Multi-year planning has been practiced successfully by many states, says the report, but New Jersey isn't one of them: the state has no such plan in place.

Copyright 2012 ABC News Radio


California Slashes Services: Why Aren't Citizens Up in Arms?

Comstock/Thinkstock(SACRAMENTO, Calif.) -- Within hours of one another this week, legislators in Greece and California both announced plans for fiscal austerity.

In Greece, violent rioting followed immediately.

Public reaction in California remains to be heard, but experts on American politics and society say that though protest is certain, Americans' reaction to austerity measures are usually found at the ballot box, not on the streets.

In Greece, lawmakers moved forward a controversial packet of measures that would cut spending and raise taxes by $40 billion.  Some $70 billion in government services would be privatized.  Police in Athens fired tear gas to defend Parliament as an angry mob hurled rocks, bottles and any other weapons they could find.

In California, after months of wrangling, the legislature passed an $86 billion budget, plugging what had been a $9.6 billion deficit by means of a mix of spending cuts, fees and higher-than-expected tax revenues.  Related legislation would shift state prison costs to local governments and would open the door to more cuts in school and social service budgets, should state revenue projections come up short.  Cuts in March already had slashed billions of dollars from state welfare, Medi-Cal and in-home support services.

Californians of every description voiced their anger.

"Every Californian should be outraged," said Yvonne Walker, local head of the Service Employees International Union, in a formal statement.  The austerity measures, she said, would cut "vital services Californians rely on."

The head of the state's law enforcement association called the new cuts "absolutely astounding," and predicted they would force the elimination of 600 law enforcement positions.  The reduction, he said, would amount to an invitation to drug gangs to invade the California.

At the University of California, which had already seen $500 million in cuts in March that led to higher tuition charges and prompted angry student protests, the president's office said a further $150 million removed from the budget would de-stabilize higher education.

Copyright 2011 ABC News Radio


Bankrupt Cities Using Emergency Financial Managers to Recover

Comstock/Thinkstock(BENTON HARBOR, Mich.) -- A growing number of cities have been saved from bankruptcy by private-sector, for-profit consultants granted sweeping powers to modify, reject, terminate and renegotiate contracts, including union contracts.

They can also amend budgets, determine staffing, eliminate departments and remove members of local pension boards, as well as overrule mayors, city councils and other elected officials.

What Old Man Potter tried to do to Bedford Falls in the movie It's A Wonderful Life -- get his fingers around every single aspect of municipal life -- they are doing routinely in towns such as Benton Harbor, Michigan.

Some of them go by the name of emergency financial managers, or EFMs for short.  Critics have other descriptions, however, including dictators.

"Most definitely," Benton Harbor commissioner Dennis Knowles said of last month's appointment of an EFM, though conceding that the city needed help after making a series of bad financial decisions.  "But the city now is under a dictatorship.  We aren't able to make our own decisions.  All we [the commissioners] can do is meet, approve minutes of the meetings, and adjourn.  It's a blatant disregard of the democratic process, the voice of the people."

In Michigan, such managers, appointed by the governor, control not just cities -- including Hamtramck and Ecorse outside Detroit -- but Detroit's public school system as well.

The phenomenon isn't limited to Michigan.  Indiana is in the process of creating its own version of EFMs.  In New York and other states, comparable powers have been granted to receivers and to oversight boards.

The budget of New York State's Nassau County, for example, which suffers from a $176 million deficit, has been put under the control a state-appointed six-member oversight board.

Michigan's emergency managers were created by the Local Government and School District Fiscal Accountability Act, introduced by Republican Gov. Rick Snyder and signed into law March 16.

Terry Stanton, information officer for Michigan's Department of the Treasury, said the intention of the law is simple: to protect the health, welfare and safety of local government.

As for charges of "dictatorship," he said, "No one likes to see their authority taken away.  But it's important to note that often times it was the elected officials who were the ones unable or unwilling to address financial problem before they got crisis stage."

The act, he said, has information-gathering provisions designed to give towns early warning they are headed for financial trouble.  That way, they would never need to call in an emergency manager or to have one assigned to them.

Copyright 2011 ABC News Radio


States in the Red Try Creative Ways to Balance Budgets

Photo Courtesy - Stephen Chernin/ Getty Images(HARTFORD, Conn.) -- From Connecticut to Wisconsin, states across the country are trying to fill budget gaps with new taxes and cuts in spending.

In Connecticut, Gov. Dan Malloy is even going after coupon clippers.  As part of $1.5 billion in new taxes in Connecticut, Malloy proposes a sales tax on the original price of something -- never mind whether you get a big discount when you buy it.

Larry Dorman, spokesman for the Connecticut State Employee Bargaining Agent Coalition, said the coupon tax and the governor's other budget proposals "hit the middle class disproportionately."  He said he is also concerned about the possible repeal of a $500 property tax credit and an increase in the income tax on middle-income wage earners.

Ben Barnes the Secretary of the Office of Policy and Management in Connecticut's budget office, said that the taxes were not preferred solutions to balance the budget.  He said they were painful but necessary features of a budget proposal.  He also said Gov. Malloy's budget proposal was a "good mix of revenue, spending cuts and concessions from state employees" to balance the budget.

Dorman said the state employees union has been "constructively engaged" with the governor and "hopes to continue that process."

"This isn't Chris Christie or Scott Walker," said Dorman, referring to the governors of New Jersey and Wisconsin who have played tough with labor unions.  "So there's some reason for optimism at this early stage."

Many states are also feeling the pinch and getting creative to find financial solutions.  In January, Illinois approved an increase in the sales tax and corporate tax rates, to the dismay of businesses there.

Jimmy Patronis, a Florida state legislator, said some companies in Illinois have expressed interest in moving south.

"We have been very frugal with how we've been doing business," said Patronis.  "The cost of doing business here is very reasonable.  It has made us a little bit of a safe haven."

But Florida has a budget deficit of its own.  Florida's state legislature will begin to try to fill a $3 billion budget shortfall when it convenes on Mar. 8.  Its spring lawmaking session will last 60 days.

Patronis, in his fifth year as a representative of Panama City, said Florida will have to make a number of tough decisions to constitutionally balance the budget.

Copyright 2011 ABC News Radio

ABC News Radio