Problems at the core of state budgets

By: Ed Muir

There are signs that state governments are emerging from the worst fiscal crisis since World War II. A recovering economy and state actions to raise revenue are at the heart of this welcome development. But, according to a recent report from the Center on Budget and Policy Priorities, this good news masks larger financial problems for state government: While there might be enough revenue to fund public services in a good year, most states have what is known as a structural deficit. Simply put, the systems by which these states raise money cannot be relied upon in the future to provide funding needed to maintain public services.

For example, New York state’s Division of Budget projects that in just a few years, the current revenue system will only be able to provide 87 percent of the funds needed to offer services. New Hampshire’s government estimates that the system can only meet 92 percent of the state’s needs.

Among the factors that contribute to the presence of structural deficits are corporate tax loopholes, reliance on taxes like the sales tax whose natural growth lags the growth of the economy as a whole, and flat taxes that do not capture wealth where it is growing most—among higher-income earners. Other problems include tax policies, such as Colorado’s Taxpayer Bill of Rights, which place caps on revenue such that it cannot grow at the same rate as the economy or the cost of public services.

The center created a 10-point checklist of state policies that contribute to the presence of structural deficits. The center ranked each state based on the number of problems it found. Most states had at least seven of these factors present. A handful, including Alaska, Colorado, Florida, New Mexico, Pennsylvania and Texas, had nine or 10 of the factors.

One of the problems the center identified is tax breaks for senior citizens. As our population ages, the effect of these well-intentioned benefits will increase. The very facts that senior citizens are living longer and that society as a whole is aging underlie this problem. Although the center does not discuss this specifically, a similar argument can be made about public employee pensions. And this helps explain one of the larger legislative battles the AFT is fighting in state capitals across the country: efforts to protect pension funds for public workers like teachers and faculty, firefighters and police.

Pension funds, which during the 1990s were riding high, in many cases face substantial unfunded liabilities. Poor stock market performance, and the simple facts that retirees are living longer and the ratio of retirees to active employees is growing, are among the causes. But another part of the problem is the decision by states to skimp on their pension contributions. This happened during the boom years of the 1990s when stock market performance was so good that funding goals could be met without states putting in their share. It happened during the recession when states decided to forgo their pension contributions because money was tight. As a result, benefits are under attack.

In Alaska, Gov. Frank Murkowski has succeeded, despite a major campaign by the AFL-CIO, to convert the pension plan from one that offers a guaranteed benefit to one in which the state makes a smaller contribution to an individual account the employee is responsible for overseeing. Gov. Arnold Schwarzenegger has been temporarily stymied on a similar campaign in California. In Illinois, New Mexico, Rhode Island and other states, battles have been fought over givebacks on benefits that would cost employees and would save the state money.

One lesson of the center’s report is that these issues, like other issues involved in funding public services, should not be addressed in a vacuum, but as part of a broader discussion of how states should meet their responsibilities. Sacrifice should not be limited to any one sector of the citizenry.