That's the message of a
recent report from Richard Ravitch and Paul Volcker that deserves far more
attention than it has received.
Since 2010 the former
New York Lieutenant Governor and Federal Reserve Chairman have been
scrutinizing the balance sheets of six of the largest states—California,
Illinois, New Jersey, New York, Texas and Virginia.
Their conclusions make
clear that Washington is not the only part of the government headed for the
fiscal cliff. Some of the problems the State Budget Crisis Task Force
identifies are familiar: growing health-care spending and unfunded pension
liabilities, for example. Others are not. Taking in "the totality of the
problems," Messrs. Ravitch and Volcker write, "the storm warnings are
very serious" and the "existing trajectory of state spending,
taxation and administrative practices cannot be sustained."
• Medicaid. This
state-federal program that increasingly pays for middle-class health care is
the major albatross. Spending has grown faster than the economy every year
since the 1960s, 7.2% annually over the last decade. It is now the largest part
of state budgets—24% on average—and "the imbalance (or structural budget
gap) can no longer be absorbed without significant cuts to other essential
state programs like education or unpopular tax increases or both."The
panel also found that these costs are driven by states choosing to increase
enrollment and create new benefits, rather than by rising underlying medical
costs. One of four New Yorkers is on Medicaid, and 70% of the coverage is not
required by federal law. Some 29% of California's population is in Medicaid,
though it only accounts for 11.8% of the Golden State budget, well below the
national average of 15.8%. But that share is so low only because California
spends so much on other things too. New York spends more on Medicaid than
Florida, Texas and Pennsylvania—combined. Medicaid costs over the decade are
due to jump 8.1% annually, as required by the Affordable Care Act's expansion.
Without ObamaCare, the yearly rise would still be 6.6%.
• Pensions. The
burgeoning retirement benefits that states owe their public employees are
well-known. But the Ravitch-Volcker task force emphasizes that, unlike federal
entitlements, state pension obligations are almost always constitutionally
protected. In other words, they are non-modifiable contracts, not merely
political promises. California has 62 state and local pension systems, Texas
75, Illinois 457. The 1990s and 2000s saw a reckless benefit
build-out—California even increased pensions for people who had already
retired. The states are supposed to prefund these liabilities so they are able
to pay out once vested, but by and large they don't. States then assume an 8%
return on their investments, which means they can stint on their taxpayer
contributions and make their pensions look healthier than they really are. The
bad news is that today they already look like they belong on a gurney at
Antietam, despite such gaming. Using more conservative assumptions, the task
force calculates that the unfunded liabilities in the six states comes to
$386.2 billion, or about a quarter of every dollar they will eventually be
required to spend. The task force also does the service of noticing retiree
health insurance benefits, which states (unlike corporations) are not required
to disclose. At a minimum, the panel figures the six states owe $539 billion,
with no plan to defuse this time bomb. Combining pensions and other special
public employee privileges, Illinois's total unfunded liability works out
to $15,800 per citizen—the only all-in data the task force could acquire. The
true number may be far higher in the other five states.
• Budget gimmicks.
The other novel Ravitch-Volcker observation is that no one knows for sure how
deep these problems run, because the states are running bookkeeping cons that
disguise the fiscal realities. The task force uncovered "chronic
dependence" on gambits like assets sales, "temporary" raids on
rainy-day funds, and shifting current spending to future years "as an
ongoing budget strategy. "New York created an Albany-guaranteed
"local government assistance corporation" to hide spending that would
have run through the general fund. Illinois is borrowing short term for cash
flow to make unpaid bills. California, Illinois, New Jersey and New York are
even securitizing their future tax revenue—that is, not merely
borrowing with bonds that must be serviced but selling their projected tax
collections to investors. So to "balance" their budgets today,
they're making it far harder to correct them in the future and locking in
higher tax rates. Even Greece doesn't do that. The message of the
Ravitch-Volcker report is that some large portion of the states are replicating
the dysfunctions of Washington—adding to entitlements that crowd out priorities
like schools and bridges, and then concealing the real danger when they're not
ignoring it. State and local governments now spend $2.5 trillion, and rising.
Without 49 more Scott Walkers, the fiscal mayhem has only begun.
Comments:
The T-SPLOST affair let us know that Georgia politicians
were not above spending billions on “Obama-style Stimulus”. A look at State and local finances is in
order. We learned that bus service works
better if it’s private, so government should look at privatizing all bus
service.
The Georgia Budget pdf shows 2011 actual and 2012 estimated
spending of about $18 billion. Georgia Debt service is over $1 billion and Bonds
cost double for whatever you get. Bond
debt along with unfunded liabilities are causing cities, counties and states to
become insolvent.
The Single Audit of the State of Georgia for FY 2011
showed that Georgia administered over $30 billion in federal grants in addition
to its published $18 billion. Georgia
receives borrowed and printed federal dollars from all federal agencies to be
distributed to grant winners. Medicaid tops the list at about $6 billion, Unemployment
is $3.2 billion, Student Loans are $2.3 billion, Transportation is $1.7
billion, The other $16.8 billion goes to federal agencies and a ton of education
and healthcare programs. It looks like
it would be easy to cut $1 trillion a year in federal spending. Most of this extra spending is “Stimulus” and
it is pushing up education and healthcare prices with no improvement in
anything but the buildings.
The State needs to come clean on this audit and report
all sources and expenditures. In 2013,
when the music stops, many will not have chairs to land on.
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