September 16, 2014

Task Force Identifies Growing Fiscal Challenges for States

Many state and local governments have done little to address growing structural problems in their budgets that have been aggravated by federal deficit-reduction efforts, according to the State Budget Crisis Task Force.

The bipartisan organization released its final report last week, reiterating a stark warning from its previous reports: “The existing trajectory of state spending, and administrative practices cannot be sustained.”

Former Federal Reserve Chair and Concord Coalition board member Paul Volcker co-authored the report along with Richard Ravitch, a former lieutenant governor of New York. They urged state and local governments to deal with their budget problems and suggested that federal policymakers should focus more attention on how their own deficit-reduction efforts will impact other levels of government.

The task force’s work has concluded with this report, but Volcker plans to start a new organization, the Volcker Alliance, that will follow up on the recommendations and issues raised by the task force.

The task force recommends that Congress create an office to monitor and analyze how federal actions will affect state and local budgets, possibly as part of the Congressional Budget Office.

Unfortunately, many in Congress have focused their deficit-reduction efforts on only one part of the federal budget: discretionary spending that lawmakers approve on an annual basis. This has impacted state and local governments through cuts to programs such as Head Start for preschoolers and Meals on Wheels for the elderly.

The task force estimates that more than $5 billion of cuts hit state governments in 2013 due to sequestration alone, affecting crucial state and local services. The report says that “fiscal stress runs downhill,” adding that this stress “adversely affects the public support systems” that Americans depend on, such as police and fire protection and a clean water supply.

The report says state and local governments have allowed their ever-growing pension and health care costs to crowd out funding of priorities like education and infrastructure work. A 2012 report by the task force also noted that eroding tax bases with volatile revenues have contributed to the fiscal issues facing many state and local governments.

Despite the previous work of the task force and other organizations that study state and local finances, the 2013 report says no structural reforms have been proposed in many states. State budget laws and accounting practices mask unfunded pension liabilities and other structural imbalances, delaying necessary reforms.

In some cases fiscal imbalances have been unaddressed for so long that they resulted in governments declaring bankruptcy, with Detroit last year becoming the most notable case.

The task force recommends that states reform their accounting practices to encourage greater transparency of government finances; use multi-year plans to better account for future obligations; implement more reforms to health care delivery systems to restrain Medicaid cost growth; more responsibly oversee and manage their pension funds, and find new ways to invest in infrastructure to better support their economies and revitalize their tax bases. The report also notes that states will face difficult financial questions as the implementation of the Affordable Care Act continues.

The report shows some parallels between state and federal budget concerns and how the actions at one level can impact other levels. State and local policymakers, like their federal counterparts, must address the structural fiscal imbalances to protect taxpayers now and in the future. Policymakers at all levels must work together to implement sound policies that improve the fiscal health of the states and the country.

In this year’s State of the State address, National Governors Association’s Chair Mary Fallin spoke about some these issues raised in the task force's report, stating that federal deficit reduction should not be accomplished by shifting overly burdensome costs to the states.