States of Denial
Millions of Americans are using common sense to make difficult choices about their family budgets. Unfortunately, that same common sense approach is in short supply in state capitals as legislators and governors ignore financial reality and avoid facing tough choices about their state’s budget.
The discussions regarding the severity of the state budget crises are misleading. In reality, things are much worse than people realize. Long term joblessness and plunging real estate values have sent state revenues plummeting. A dozen large states are near insolvency. In Michigan, revenue is at 1970’s levels. Deeply reduced state revenues are likely to persist for some time to come.
Legislators, governors, and local officials have relied on economic expansion and rosy revenue projections for decades. Such attitudes have led to the reckless growth of the size, scope, and cost of government. It also has generated higher taxes and unsustainable promises to employees in the public sector.
The combination of profligate spending and declining revenues is running up a combined state government deficit of an astounding $134 billion, according to the National Governors Association (NGA). The chair of the NGA, Vermont Governor Jim Douglas, said, “The worst is probably yet to come.”
Simply put, state officials have made expensive promises that taxpayers cannot afford.
Despite the clear and unmistakable fact that fundamental change is badly needed, many state officials are in budget denial and they refuse to address the severity of the fiscal debacle. These “States of Denial” are instead indulging in budgeting gimmicks and accounting ploys that attempt to mask the problem but ultimately exacerbate it. There are four popular budget games currently being played in legislatures around the country.
Kick The Can Down The Road
Many states are using one-time funds, most often federal stimulus money, to compensate for budget shortfalls. The legislatures fund projects with full knowledge of the fact that these short-term “solutions” are creating long-term problems.
Examples of this can be found around the nation. Washington State used more than$3.5 billion in federal stimulus funds for ongoing programs. The trick where states sell state office buildings and then leave them back has been implemented in Arizona and is being considering in both California and Nevada.
Sleight of Hand
State officials are also using “creative” techniques to avoid having to develop substantive solutions. Some of these practices include changing accounting rules as Wyoming has done. Some states have raided other funds and creating budget transfers to show temporary solvency. For example, Washington State transferred $269 million from other funds to “balance the budget” of the General Fund. Another sleight of hand in Washington is the state’s underfunding pensions by assuming state employees work longer than normal and that, when employees retired, assuming that they would die earlier than the mortuary tables indicated.
Other states have deferred payments and tax refunds and overstated revenue projections.
Some states, including Minnesota, have resorted to taxing hospitals in order to achieve eligibility for federal funds, only to then increase reimbursement rates to those same hospitals. Washington they raised $33 million by taxing hospitals which resulted in getting more money from the federal government. Then the legislature returns $33 million to the hospitals and nursing homes by increasing the reimbursement rates.
Other states, including Kansas have refinanced debt only to refuse payment of the principal and interest, and then assume a lower rate of inflation than is reasonable. Gov. Quinn of Illinois plans to borrow $4.7 billion to pay old bills and then leave $6 billion in unpaid bills. California, Colorado, Minnesota, and New York are taking similar action.
Washington lost a court case and won’t repay $59 million triggered by a court decision unless the companies sue to get their money back. New York’s Comptroller warned that unlikely revenues and lower tax collections could increase the current year deficit by $2 billion.
Looting the Future
As they try to cope with the fiscal woes of the present, state officials rely heavily on the promise of “better times” to be had in the future. Some state officials are proposing massive tax increases in an effort to avoid cutting spending and reforming government. Increasing state taxes, however, actually decreases revenues. Increasing taxes makes it harder for businesses to grow.
Legislators are also underfunding pensions and building in assumptions about continued federal assistance. New Jersey Gov. Christie of New Jersey plans to delay putting $3 billion into state pension funds. Virginia will borrow $620 million from their pension system. The Washington State Legislator assumed state employee health care costs would rise by only 3% for the next two years in order to help balance the budget. As a result the state employee health care fund is projected to have a $220 million deficit by June 30, 2012
In 2009, the Washington Legislature took millions from the Liquor Control Board-a state monopoly-to balance the budget. The Liquor Board then raised the mark-up price to their retail outlets in order to get more money in the fund.
State officials must not give in to gimmickry and denial. Now is the time for creative and innovative approaches to reality-based budgeting, pension reform, and tax policies that stimulate growth and jobs. It is time for state government officials to take the same kind of realistic, common sense approach to the state budget that millions of Americans bring to the family budget.