Subscribe
State Budgets, the Next Fiscal “Crisis”
Repost from Cogito Ergo Blog.
The holiday week has been quiet. The Big Three CEOs went home (presumably flying in Coach-class), president-elect Obama has a least slowed his moving out furniture and walking W to the door. For now, the electorate has been left to lick their wounds from the bailout/election/bailout cycle. And the “newsies” are focused on the terrorist attacks in India.
But the respite will not linger. December 2nd is the date that the Big Three need to present an “acceptable” plan to Congress in order to earn another bailout and the next ill-fated stimulus package is being negotiated (defining how the newly-elected will pay back their support groups with tax payer handouts). As expected, the line for more handouts is starting to form, as city transit agencies are due to come, cup in hand to the Hill this week. Beyond economics, the world is watching the terrorist attacks in India, the fact remains that pirates now hold at least a dozen ships, shoppers are trampling to death fellow human-beings to save $50 on the newest gadgets, and the constant rumblings from Iran continue. As Peggy Noonan says, there are many disturbances still ahead.
So before the holes start springing in the economic dike, this is a good time to re-group and see what we have created. In a post last week, a discussion ensued about how the government is perpetuating a moral hazard of undefined scale and scope. Moral hazard is an economic concept founded in the insurance business. The premise is that people will take greater risks, or engage in more risky behavior than otherwise, because they believe they will not bear the full consequence of their actions. And while much has been made of the Wall Street / Detroit bailouts ($4.3 Trillion, so far), the next group of over-spenders is getting ready to put out their hands – and taxpayer will soon be asked to stem the impending failure of state governments to meet required balanced budgets.
Some 41 states are facing budget shortfalls. According to the Center on Budget and Policy Priorities, the current total gap is expected to be $24.3 billion, and will continue to grow as economic growth slows. The shortfall is expected to double for fiscal year 2009, to close to $48 billion. And unlike the federal government, most states cannot run a deficit (by the force of constitutionally bound balanced budget requirements) or borrow to cover expenditures.
One reason for the budget woes; state revenues have been negatively impacted by reduced state sales tax revenue, reduced property tax revenues, and as the employment situation deteriorates income tax revenues will weaken. Further pressure will be felt as local governments will seek relief from the state government to offset reductions in local education budgets.
As a result, cuts will occur at the state level for public health programs, for elementary and secondary education, and to impose workforce reductions. Some states will tap “rainy-day funds” to make up shortfalls, but even these measures may fall short. At the end of FY06 reserves averaged 11.5% of state spending. This number has declined to 7.5% as the economy enters the FY09 recession.
How have states managed their income statements? Of course it varies by state, but using California as an example – during FY08, the state spent $13 billion more than it has received in revenue, spending $108 billion, while bringing in $95 billion as of March 29, 2008. Is this a new phenomenon? Hardly - there has been a 32 percent increase in California’s spending from 2003 to 2008, with revenues falling far behind.
California is spending $10.5 billion annually to fund benefits for illegal immigration, according to the Federation of American Immigration Reform. On an aggregate basis, the total K-12 school expenditure for illegal immigrants costs states nearly $12 billion annually, and when the children born here to illegal aliens are added, the costs more than double to $28.6 billion.
And while California has budget shortfalls of large scale proportion, 41 other states have the same issues on a smaller scale. The politician’s response so far – hope. That is, they hope to find “efficiencies” in consolidation of some departments, or hope to out-source certain functions, and last the always popular “across-the-board” cuts.
There is no doubt that states have been spendthrifts over the past four to six years. And the inertia from this spending will need to be slowed now that the inevitable economic downturn drags down revenues. And unlike the current cycle of governmental actions (guarantees, capital infusions, et. al.), the state budget problems will be felt on a very local level. Education funding will be cut, affecting school programs and administration. Infrastructure maintenance will be reduced. And to make matters worse, individual cities are also facing huge deficits, causing cities to find ways to increase revenues (see NYC tax on plastic bags).
Over the next six months Americans will see the results of years of out-of-control spending at the state and local levels. And we will face the consequence of the failures of our elected officials to act as fiduciary stewards of our state and cities. The split between Republican and Democratic governors is about even - 22 (R) to 28(D) – and each state has their own reasons for success or failure (immigration funding, managed health care debacles, etc.), but in the end, the governors and legislatures have spent our taxes like a sub-prime borrower. The bill will soon come due. And has become the practice of the day – the failed managers (CEOs, Mayors, Governors, and just about every other failed enterprise), will make their way to DC for a taxpayer bailout of their economic malfeasance. As for the rest of us - in the words of an Obama-mentor (at least before his fall from grace) – “the chickens have come home to roost”.
