As of July, the federal deficit is $15,874,365,457,260 with a projected $1.211 trillion federal deficit in the current year. Deficit-reducing growth projections continue to appear dismal, as the potential expiration of the Bush tax cuts could have a harshly detrimental impact on the economy.
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The combined state deficit (spread among 31 of the 50 states) totals $55 billion. The importance of state government fiscal health is vital. As noted by the State Budget Task Force (SBTF) state and local governments spend $2.5 trillion annually and employ over 19 million workers–15% of the national workforce and 6 times as many workers as the federal government.
IMPROVEMENTS MADE, CHALLENGES REMAIN
The federal General Accounting Office (GAO) notes that “the fiscal situation of the state and local government sector has improved over the past year as the sector’s tax receipts have slowly increased in conjunction with the economic recovery…From the 2nd quarter of 2009 to the third quarter of 2011, total tax receipts increased nearly 11%, returning to the prerecession levels of 2007.”
A moneybasicsradio.com report noted that tax receipts are better this year, and the “fiscal state of the states is good.” A spring analysis by the National Conference of State Legislators reported that “revenue performance remains positive and expenditures in most states are stable…state lawmakers have closed more than $500 billion in budget gaps over the previous four fiscal years.”
Comparisons are difficult. The federal government can print money, while the states cannot; and the federal government can impose mandates on the states, not vice-versa. Moreover, the states have received funds from the federal government. Over approximately two and a half years, the American Recovery and Reinvestment Act provided between $135 to $140 Billion dollars to them. This amounted to between 30 and 40 percent of FYs 2009-2011 state deficits. Most of the funds were Medicaid funding, according to the Center on Budget & Policy Priorities.
40 states have also raised taxes (nine reduced them)–an option the federal government cannot take, since it would depress a national economy already in danger of sliding back into recession, or, under some views, continuing the current recession and making it far worse.
BALANCED BUDGET LAWS
Far more important than federal assistance in keeping deficits down, however, is the impact of balanced budget laws throughout the states. The National Conference of State Legislatures (NCSL) reports that 49 out of the 50 states have some sort of balanced budget requirement (Vermont being the exception, and some dispute whether Alaska, Wyoming and North Dakota laws actually meet the popular definition) although the meaning of “balanced budget” is not fixed.
According to NCSL, “Most states have formal balanced budget requirements with some degree of stringency, and state political cultures reinforce the requirements…Constitutional and statutory provisions requiring balanced budgets are often unclear, making it impossible to count the different kinds of requirements with precision. Some state requirements that governors and legislators regard as binding have emerged over time through judicial decisions based on constitutional provisions that have little to do with budgets. Not only is it difficult in some states to determine the constitutional or statutory authority, but often it is also unclear what the enforcement mechanism is. Considering the lack of specific constitutional mandates and enforcement structures, state compliance with the principle of a balanced budget is notable. Restrictions on debt play a part, but are an insufficient explanation for the fact that even states that can legally carry a deficit from one year to the next try to avoid doing so. It appears that the political convention that state budgets are supposed to be balanced is its own enforcement mechanism.”
How the States are Faring
There is significant differences in opinion in how sound state finances are. There is, however, common agreement that over the past several years, the “Great Recession” has played havoc with the fiscal position of state governments.
The National Association of State Budget Officers (NASBO) notes that despite a gradually improving fiscal prospect and rising general fund spending, resources remain tight, and revenue growth will remain below peak levels in the coming year. NASBO describes a “new normal,” where scarce resources produce slower revenue growth, and the challenges of rising health care, education, and pension costs will continue to grip state capitals.
The GAO is concerned that property tax receipts which had improved 3% from the second quarter of 2009 to the third quarter of 2010, increased less than 1% from 2010 to 2011. Combined with reduced federal aid, rising Medicaid/health care costs, and decreased return from investments of held pension funds, the GAO’s outlook is not optimistic. The impact of the Patient Protection and Affordable Care Act (Obamacare) also provides significant uncertainty.
While the trend in tax receipts is improving, “The hole was so deep that even if revenues continue to grow at last year’s rate-which is highly unlikely-it would take seven years to get them back on a normal track” according to the State Budget Crisis Task Force (SBCTF)
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On July 17, the SBCTF led by former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch, released what they described as the “first ever comprehensive report detailing threats to states fiscal sustainability and actions that can be taken to address them.”
The Report focused on the fiscal conditions in six heavily populated states, including California, New York, Illinois, New Jersey, Texas and Virginia. Their conclusion: “the existing trajectory of state spending, taxation, and administrative practices cannot be sustained. The basic problem is not cyclical, it is structural.”
According to the SBCTF, the major threats to financial stability include:
- Medicaid spending growth is crowding out other needs. The report notes that Medicaid spending is far outpacing revenue growth. “Based on recent rates, the gap could widen by $23 billion within 5 years.”
- Federal deficit reduction threatens state economies and budgets. The report notes that “a 10% cut in grants would cost California and New York, each, more than $6 billion annually.”
- Underfunded retirement promises create risks for future budgets. Volcker and Ravitch point out that pension liabilities in the six jurisdictions reviewed are underfunded by $385 billion, and retiree health benefits promises by more than $500 billion.
- Narrow, eroding tax bases and volatile tax revenues undermine state finances. State tax revenue is diminishing, [particularly during the years of the Obama administration.] New Jersey is cited as a prime example. From 2005-2008, income state revenue reported by Trenton grew 32%, then declined by 16% from 2008 to 2011.
- Local government fiscal stress poses challenges for states. The study emphasizes that this challenge, while affecting a number of states, hits California particularly hard, “Where sharp declines in property tax revenue, increases in pension costs, and state aid cuts have contributed to severe fiscal stress.” The Pew report notes that while property tax revenue surged from 2000 to 2008, it declined sharply thereafter.
- budget laws and practices hinder fiscal stability and mask imbalances. The study criticizes state finances as being “opaque,” without multi-year financial plans. It notes that rainy day funds are inadequate, and temporary solutions are often used to cover gaps.
STATES HAVE DONE
WHAT WASHINGTON HAS NOT
Research by The Pew Center for the States indicates that states have managed to spend less since 2008, with 37 states below pre-recession fy 2008 spending levels, an accomplishment which has eluded Washington. NASBO believes that states will manage to restore some cuts in FY 2013, while taking “painful” actions and avoiding bankruptcy. Cuts have been made to education, public assistance, Medicaid, corrections, transportation, local aid, and state employee levels. Agencies have been reorganized.
While benefiting from federal aid, the states have succeeded where Washington has failed largely due to a commitment to at least a semblance of a balanced budget.