Why the Federal Budget Crisis Won't be Solved in Washington

Washington can't fix the broken structure that it built. The key is for state and local officials to channel an aroused citizenry.
by | July 1, 2013

Under our federal system, everything is connected. Decisions at each level of government can profoundly affect conditions at every other level, but policy makers at the national level rarely consider the impact of their actions on states and localities. Likewise, local-government officials complain that policymakers in state government take little regard of the impact of their decisions on cities, counties and special districts.

That's not news, of course, but it's a truth that's been driven home again for Richard Ravitch. After serving as lieutenant governor of New York, Ravitch became convinced that the state faced an impending financial crisis that was masked by its budgeting practices and misunderstood by its citizens. He suspected that the same was true in other states, and so persuaded his long-time friend and office-mate, former Federal Reserve Chairman Paul Volcker, to join him in forming the State Budget Crisis Task Force. The task force issued an initial report last July, followed by special reports on each of the six states it used as case studies. A final report will come out this fall.

What Ravitch and his colleagues on the task force may not have anticipated was the degree to which understanding and proposing steps to deal with the financial crisis facing the states is greatly dependent on understanding and confronting the financial crisis facing the federal government.

Thus it came to be that the last two of several national dialogues hosted by a state budget task force had a distinctly federal focus. The first of those dialogues, a private meeting last Monday of thought leaders, many of whom were chosen for their expertise on federal budget issues, was a deep dive into federal finances with an eye toward examining the impact of federal budget decisions on states. The second, a meeting the next day that was open to the press, focused more broadly on federalism.

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That second meeting began with an opening statement from Philadelphia Mayor Michael Nutter in which he denounced federal officials for "balancing the federal budget on the backs of cities and counties." He and other state and local officials are especially concerned about the current threat to eliminate federal tax exemptions for municipal bonds. Noting that his city's schools are laying off 3,800 teachers, Nutter declared, "We've already been to the fiscal cliff. We made our cuts and raised taxes. We're trying to come back. Please don't stand in the way."

It's hard to overstate how much is at stake. States and their local governments spend $2.5 trillion annually, employing 19 million workers, delivering the bulk of social services provided to Americans, and building and maintaining most of our infrastructure. They act as a delivery agent for federal policies and deserve a prominent seat at the table as federal deficit-reduction proposals are discussed. In its initial report, the State Budget Crisis Task Force stated, "Prompt attention is needed to the effects that federal deficit reduction and major changes in the federal tax system will have on states and localities."

It's clear to me, however, that a fix at the national level will not come from inside the Beltway. Insiders with decades of experience and who are most intimately acquainted with the people and processes within the national government are extremely pessimistic about the options and opportunities for improvement. They're looking at a policy structure that they largely built. Because they are its architects, they can't see how to change it.

I think state and local government officials are the ones who can break the logjam in the federal budgeting and financing process, and they can do it by mobilizing and channeling the growing anger and resentment of their constituents. Often when we talk about citizen engagement, it is in the vein of arousing citizens and exciting within them an interest and concern about public-policy issues. But plenty of people are already aroused. The Occupy and Tea Party movements were precursors. Today, one place to see this is in the sharp conflicts occurring in the K-12 public-education arena. The key is for public officials to find a way to connect with the public and channel that arousal in a way that changes the politics.

At the session on federalism, Joseph Minarik, senior vice president of the Committee for Economic Development, put it this way: "How long does it take until people find out it doesn't work? ... By the time the consequences are felt, we will be well down the curve on quality of life." But the people do know. They just haven't figured out what to do about it yet. Millions of Americans lost significant amounts of personal wealth in the recession, millions lost their homes, millions remain stuck in long-term unemployment, and virtually everyone outside of the 1 percent is worried about the prospects for their children.

At one point in the discussion, John Sununu, a former governor of New Hampshire and former White House chief of staff, said, "You will not solve this problem until you change the process. ... I urge folks to stop trying to change the dial a little. ... The partisan nature of the current fight has allowed people to pretend the current system works." That's a pretty powerful insight, but the process to change isn't the federal budget process. You have to start further downstream, where that aroused populace can make itself heard at the ballot box.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com  | 

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