A new, high profile report by a distinguished bipartisan group of experts chaired by former Fed chief Paul Volcker and Former New York Lieutenant Gov. Richard Ravitch, shows that state finances are much worse than many believe, and that massive adjustments are coming our way.
While some have argued that talk of a crisis in state budgets is overblown, the report of the State Budget Crisis Task Force says that much of the recent improvement in the balance sheets of some states is the result of accounting gimmicks and the true picture remains dire. States have resorted to cheap tricks like delaying payments by a month or two to push the expense into the next fiscal year or selling off state assets for quick cash, but the long term mismatch between revenues and projected expenses remains out of control.
State pensions, along with Medicaid, are the largest drag on state budgets, and politicians have also been unable to resist the temptation to loot pension funds to pay for other liabilities. From the New York Times:
Desperate budget officials often see public pension funds as an almost irresistible pool of money. One common way of “borrowing” pension money is not to make each year’s “annual required contribution,” the amount actuaries calculate must be set aside to cover future payments. Despite its name, there is usually no enforceable law requiring that it be paid.
As a result, the report found that from 2007 to 2011, state and local governments shortchanged their pension plans by more than $50 billion — an amount that has nothing to do with the market losses of 2008, which caused even more harm.
When money is withheld from a pension fund, the arrears can snowball, because most states count on the money compounding at a rate of about 8 percent a year. Eventually the unfunded liability grows unmanageable. And states and municipalities have promised an estimated $1 trillion in health benefits — that most have not started saving for — to their retirees.
One sign of how serious these problems are: while some of the Task Force’s budget came from longtime deficit hawk Pete Peterson, George Soros’ Open Society Foundation cosponsored the group. This is not a group of partisan Republicans playing “gotcha”; this is a serious effort to come to grips with a major national problem.
An economic recovery will help states stave off the worst for a while as revenues rise, but the reality is that the way American state and municipal governments do business must change. We’ve said it before and we’ll say it again on this site, but the progressive, bureaucratic government model and approaches to social policy developed in the 19th and early 20th centuries are too cumbersome and too expensive for our times.