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Volcker Task Force: States' Financial Woes Eroding Services

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WASHINGTON (AP) — U.S. states face long-term budget burdens that are already limiting their ability to pay for basic services such as law enforcement, local schools and transportation, a report released Tuesday said.

Aging populations and rising health care costs are inflating Medicaid and pension expenses. At the same time, revenue from sales and gas taxes is shrinking. And grants from the federal government, which provide about a third of state revenue, are likely to shrink, the report said.

Those challenges are made worse by a lack of planning by many states and the repeated use of one-time accounting gimmicks to cut costs, the report added.

The report was issued by the State Budget Crisis Task Force, a non-profit co-chaired by former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch. It focused on six states that encompass about a third of the U.S. population: California, Illinois, New Jersey, New York, Texas, and Virginia.

The states’ financial problems aren’t just a result of the recession and slow recovery, the report said. They have built up over years.

Increased spending on health care and pensions are crowding out other funding. Many states have already cut spending on public universities and infrastructure such as roads and public transit, Ravitch said at a press conference Tuesday.

California has cut its spending on state universities 12.5% in the past five years, the report said. South Carolina has reduced its support 30% in that period, the deepest cuts in the country. Florida and Iowa have cut higher education spending about 25%.

All that is making it harder for poorer Americans to attend college, Ravitch said.

“That does not augur well for economic growth in the future,” he said.

Diminished aid from states has pushed up tuition. Concerns are rising that some leading public universities, such as the universities of Michigan and Virginia, “are moving toward de facto privatization with high fees that effectively exclude many highly qualified lower income students,” the report said.

To ease that burden, some states are providing more aid to needy students rather than spending directly on colleges and universities.

Long-term trends are squeezing state finances, the report said. Spending on Medicaid, the federal-state health care program for the poor, is growing much faster than state tax revenue. The Obama administration’s health care reform will likely accelerate that growth, it said. Medicaid already consumes a bigger portion of state budgets than does spending on elementary and high school education.

In addition, state and local government pension plans are at least $1 trillion short of what they need to pay for their pension promises. Even that figure is based on dubious assumptions by many states about the investment returns their pension funds will earn, the report said. Some studies using more realistic assumptions put the shortfall as high as $3 trillion.

Meanwhile, more Americans are buying goods online, which in many cases means they don’t pay state sales taxes. A rising number of states are demanding that online retailers collect the taxes. And consumers are spending more on services, such as medical care, that don’t pay sales taxes, and less on goods.

Higher gas prices and more fuel-efficient cars mean Americans are buying less fuel, thereby reducing gas tax revenue.

Volcker acknowledged that despite these challenges, most states can still borrow by issuing bonds at low interest rates. That’s mostly because many states have constitutional requirements that they pay bondholders before they pay other bills.

The report recommends that states do more long-range budget planning. They should also be more transparent about pension promises made to state and local employees. That would make it easier for voters to understand what those promises entail. And they should build up bigger “rainy day” funds when the economy is healthy to limit the need for cuts and tax increases in recessions.

But the task force’s primary goal is to raise pressure on policymakers to shore up states’ finances.

“It isn’t going to get the attention it deserves until there are serious expressions of public unhappiness,” Ravitch said in an interview.

Resolving the problem is mostly a matter of political will, he said. Ravitch has had a long career dealing with state and local finances in New York. He helped revive New York City’s subway system as chairman of the Metropolitan Transportation Authority in the early 1980s. That involved delicate negotiations between transit unions and state lawmakers.

But now, in most states, the two parties are sharply divided on how to solve their long-term fiscal challenges, he said. Republicans are largely focused on cutting pensions; Democrats are mostly concerned with raising tax revenues.

“There isn’t any negotiation going on,” Ravitch said. “To the best of my knowledge, no one is communicating with each other.”

Ravitch said he met with Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner last week to brief them on the report’s findings.

The task force plans follow-up reports that look at each of the six states it studied. It will also issue reports on the specific budget challenges the states face.


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