Report: Without Major Overhauls, State Budget Crises Will Linger

Soaring Medicaid costs, woefully underfunded pension and health care benefits for state workers, eroding tax bases. All of these growing state liabilities will only worsen, if left unaddressed. And more trouble could lie ahead for state and local governments from measures Congress is considering to solve the federal budget crisis.

Such are the stark warnings of the State Budget Crisis Task Force, a nonpartisan group of respected budget experts, in findings released Tuesday (July 17). Its report probed budget conditions in six states — California, Illinois, New Jersey, New York, Texas and Virginia — representing a diverse assortment of governments where residents make up about 40 percent of the U.S. population.

“The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened,” warned the group’s two chairmen, Richard Ravitch, New York’s former lieutenant governor, and Paul A. Volcker, former Federal Reserve chairman.

Members of the task force say their findings might not be surprising to those who closely follow state and local governments, but they fill an information gap for the general public created by crafty political maneuvering, fewer reporters in statehouses and increased attention on the federal deficit.

“There is an appalling lack of understanding,” of states’ inability to address their budget issues, Ravitch told reporters at the gathering.

Aging populations and struggles to implement efficiency programs are pushing up Medicaid costs, which will likely keep rising. Pension funds for state and local workers are underfunded by as much as $3 trillion across the country, while unfunded health care benefits for state workers total more than $1 trillion. As state governments try to balance their budgets, those liabilities — especially those assigned to Medicaid — are diverting resources from basic services, such as education and public safety, the report said.

Some states are trying to address the problems, but that’s proved difficult, according to the task force. California proposed $2 billion in Medicaid savings in its 2012 budget, but federal regulators rejected many of those items. One approved measure, projected to reduce physician payments by 10 percent, has been delayed by litigation.

The Illinois Legislature this year passed a $2.3 billion plan intended to ease the burden of the state’s $1.9 billion in unpaid Medicaid bills, but much of it still awaits federal approval. Such approval issues have also plagued New Jersey and New York, although New York has managed to save nearly $1 billion in 2012, according to the report.

At the same time, state tax collections have withered and grown more volatile. That’s largely because state policy makers haven’t addressed a shift to a service-based economy from one more dependant upon taxed goods. Political pressure has largely forced states to retain traditional tax structures, resulting in lower collections, task force members said.

Meanwhile, as Congress considers where to slash spending to address its rising deficit, the result could mean even less revenue for states, which rely on federal grants for about a third of their revenue. A 10 percent reduction in federal grants, for instance, would mean a loss of $60 billion for states. “We are not thinking about the impact on state and local governments,” said Alice Rivlin, former budget chief for President Bill Clinton.

Although the task force had few concrete solutions, it recommended more transparency and long-term planning, including building up rainy day funds and ending the long-practiced gimmick of balancing current budgets with anticipated future revenue. The group also recommends states borrow only to finance long-term capital projects — not to pay off debt.

Right now, state policymakers “don’t look past the budget cycle” and simply pass on burdens to future administrations, said Donald Boyd, executive director of the task force.

“What I learned in Albany, is that things aren’t always as they appear to be,” said Ravitch. “It’s not to say that the apocalypse is around the corner, but it’s going to be a heck of a lot more expensive to deal with these problems in five years, compared to today.”

See more coverage of the State Budget Crisis Task Force report: 

The New York Times: Gloomy Forecast for States, Even if Economy Rebounds
Bloomberg:  Volcker Report Sees U.S. Cuts as Threatening States