States Must Stop Fiscal Gimmicks and Address Liabilities: Report

States must stop using one-year budget gimmicks and move to multi-year budgeting and mandatory “rainy day” funds in order to address growing liabilities such as Medicaid costs and pension funds, according to the State Budget Crisis Task Force.

“The costs of inaction are high. The ability of state and local governments to meet their obligations to public employees, to creditors, and, most critically, to the education and well-being of the public is deteriorating,” said the group’s chairmen, Richard Ravitch, New York’s former lieutenant governor, and Paul A. Volcker, former Federal Reserve chairman. They presented the task force’s final report Tuesday on behalf of a nonpartisan group of senior budget experts.

“National inattention to the financial pressure bearing down on state and local government can no longer be tolerated,” they said.  “What is required is recognition of the collective responsibility of our federal and state governments for action. It is, after all, our children and grandchildren who will pay the price of failure, and who will have to cope with the diminished strength and competitiveness of the American republic.”

The report also warned that the federal government is failing to consider the impact on states when it makes budget and fiscal decisions, complicating the budgetary problem for state and local governments.

“When resources are scarce, the penalties of acting without consultation and cooperation increase harshly,” the chairmen said.

The task force recommended:

• Going to modified accrual-based budgeting, rather than cash-based budgeting. This means that states should recognize transactions in the fiscal year in which they occur, regardless of when the cash is received or disbursed. A state could book an accrual for a tax payment that is owed, but has not yet been paid. For expenses, expenditure is recognized generally when the goods or services are ordered or the contract is signed.
• Multi-year financial plans. Even if states only pass one-year budgets, the task force said, they should include “meaningful, forward-looking financial plans as part of their annual budgets.”
• Maintaining and increasing rainy day funds. The report said it was “heartening” that some states have begun to do this as the economy improves.
• Strengthened oversight of local governments’ financial conditions and the ability to address emergencies (an example is the Detroit bankruptcy).
• Congress and the executive branch should “consider the impact of its decisions on the other levels of government in setting policy and spending levels for the federal government.”
• Borrowing only to finance long-term capital projects — not to pay off debt.

The report was the final step in a three-year process of evaluating state governments’ fiscal condition and outlook. Earlier, the task force reported that soaring Medicaid costs, woefully underfunded pension and health care benefits for state workers, and eroding tax bases will only worsen if left unaddressed by the states.

The study looked at 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. You can read the individual state reports here.