New Report Details Threats to State Finances

The State Budget Crisis Task Force, led by former New York Lieutenant Governor Richard Ravitch and former Chairman of the Federal Reserve Paul Volcker, today released the first-ever comprehensive report detailing threats to states' fiscal sustainability and actions that can be taken to address them. The report focuses on the fiscal conditions in six heavily populated states — California, Illinois, New Jersey, New York, Texas, and Virginia — which together account for a third of the nation's population and almost 40 cents of every dollar in spending by state and local governments.

"While the extent of the fiscal challenge varies significantly from state to state, there can be no doubt that the magnitude of the problem is great and extends beyond the impact of the financial crisis and the lingering recession," said Ravitch. "The conclusion of the Task Force is unambiguous: the existing trajectory of state spending, taxation, and administrative practices cannot be sustained. The basic problem is not cyclical, it is structural. The time to act is now."

Among the six states highlighted in the report, a common set of major threats to sustainability were identified:

• Medicaid spending growth is crowding out other needs
• Federal deficit reduction threatens state economies and budgets
• Underfunded retirement promises create risks for future budgets
• Narrow, eroding tax bases and volatile tax revenues undermine state finances
• Local government fiscal stress poses challenges for states
• State budget laws and practices hinder fiscal stability and mask imbalances

"Our essential goal is to inform the public of the gravity of the issues and the consequences of continuing to postpone actions to achieve structural balance," said Volcker. "Only an informed public can demand that the political systems, federal, state and local, recognize these problems and take effective action. The costs, whether in service reductions or higher revenues, will be large. Deferring action can only make the ultimate costs even greater."

In the report, the Task Force provides recommendations for states to make changes to their procedural approaches, including: improving the quality and utility of financial reporting; adopting multi-year approaches to planning and budgeting; better use of counter-cyclical tools such as rainy day funds; clear disclosure of obligations for pension and other post-employment benefits; improved mechanisms for dealing with local fiscal stress; examining tax systems to improve their adequacy and predictability; and re-examining the fiscal relationship between states and the federal government.

The State Budget Crisis Task Force report is the result of a year of in-depth analysis into the magnitude of fiscal challenges facing state and local governments. The Task Force concluded that many challenges to sustainability are shared by state and local governments across the country. The major findings included:

• Medicaid spending is far outpacing revenue growth. Based on recent rates, the gap could widen by $23 billion within 5 years.
• Federal deficit reduction efforts will hit states hard. For example, a 10 percent cut in grants would cost California and New York, each, more than $6 billion annually.
• Pension liabilities in California, Illinois, New Jersey, New York, Texas and Virginia are underfunded by more than $385 billion, and retiree health benefit promises by more than $500 billion.
• State tax revenue is eroding and increasingly volatile. For example, in New Jersey income tax revenue grew 32 percent from 2005 to 2008, then declined by 16 percent from 2008 to 2011.
• Many local governments face increasing fiscal problems. This is particularly true in California, where sharp declines in property tax revenue, increases in pension costs, and state aid cuts have contributed to severe fiscal stress — local governments in other states face problems as well.
• States do not have proper tools to address these problems: their finances are opaque; they do not prepare multi-year financial plans, fully fund the costs of current services, or fully disclose longer term liabilities. They do not have adequate rainy day funds and their budgeting approaches encourage them to patch budget gaps with temporary resources.

Ravitch and Volcker assembled the Task Force in June 2011 after identifying their mutual growing concern over persistent structural imbalance in state budgets and the continued ability of states to provide basic services, invest for the future and provide for those in need, at a cost taxpayers will support. State and local governments spend $2.5 trillion annually and employ over 19 million workers — 15 percent of the national workforce and six times as many workers as the federal government.

The Task Force is comprised of a professional staff that collaborated over the past year to conduct research, identify challenges and develop the report. The Task Force is led by an Advisory Board that includes the following individuals: Richard Ravitch, Paul Volcker, Nicholas F. Brady, Joseph A. Califano, Jr., Phillip L. Clay, David Crane, Peter Goldmark, Richard P. Nathan, Alice M. Rivlin, Marc V. Shaw, and George P. Shultz.

The work of the Task Force was made possible by funding from a number of foundations and organizations including: The Community Foundation of New Jersey, The Ewing Marion Kauffman Foundation, The Fund for New Jersey, The Geraldine R. Dodge Foundation, The John D. and Catherine T. MacArthur Foundation, The Nathan Cummings Foundation, The Open Society Foundations, The Peter G. Peterson Foundation, and The Robert Wood Johnson Foundation, as well as those wishing to remain anonymous.

More information, including the official Report of the State Budget Crisis Task Force, is available at
www.statebudgetcrisis.org