Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

Richard Ravitch: How Budgets Really Work

The former New York lieutenant governor has 50 years of budget experience. Here's how it really works.

Richard Ravitch has spent six decades working in and around New York City and state government. He was instrumental in helping New York City navigate the way out of its seminal mid-1970s fiscal crisis and was later tapped to head the troubled Metropolitan Transit Authority. In 2008, Ravitch was named lieutenant governor by New York Gov. David Paterson and given the job of mapping a way out of the state’s long-running, chronic fiscal woes. More recently, he co-chaired a national task force looking at the fiscal prospects of key states around the country and how to steer them toward long-term financial health. With extensive private-sector experience as a banker and a developer, Ravitch has brought a high level of financial knowledge to each job.

The following excerpts are from his just-released autobiography So Much to Do; A Full Life of Business, Politics, and Confronting Fiscal Crises (on sale April 29). Reprinted with permission from PublicAffairs.

On “one-shots” and bankers

In 2009, as lieutenant governor, I attended my first leaders’ meeting with the governor and legislative leaders. One of the issues, of course, was the state’s huge and growing budget deficit. There was a solution to the deficit, said one official: New York could simply refinance its tobacco bonds. His argument was that interest rates were lower now than they were when the bonds were first issued. Therefore, the state could issue a larger amount of debt while paying no more in debt service. Even more attractive under the plan that was being proposed, there would be no amortization for the first five years. True, at the end of the five years, a huge balloon payment would be due -- but that was then, and this was now.

The idea was appalling; it kicked the can down the road in the most blatantly irresponsible way. Even more appalling was the fact that so many state politicians were ready to embrace it. But the politicians were not the primary movers in the proposed transaction. The biggest proponents were the banks.

richardravitchbook.jpg


I learned that the banks were full of ideas about how to turn the state’s future revenues into current cash, with a hefty discount, of course. Some banks had redesigned sale-leaseback transactions, like the Attica transaction, that involved state office buildings, courthouses and bridges. Some presented protocols for securitizing lottery revenues; others explained how the states could permit privatization of managed-care plans and take a percentage of the profits. It was a long list, but the proposals had a common theme: solve today’s cash shortage by making future generations pay for things we are unwilling to pay for now.

The banks making these proposals were not fly-by-night institutions; they were the biggest names in the business. I know the heads of some of these banks. They were often the same people who, filled with rectitude, regularly criticized state politicians for their irresponsibility in the face of New York’s budget crisis. I asked bankers whether they would make their own contribution to the state’s fiscal discipline by agreeing not to underwrite debt that was going to be used to plug the state’s operating deficits. They expressed zero interest in the idea. They were making significant money from underwriting these securities in the 1970s. Moreover, in the ten years immediately before I became lieutenant governor, individuals and political committees from the state’s five largest banks had contributed millions of dollars to state electoral contests.

Their refusal to connect their behavior with its consequences was intensely frustrating, and I shared my frustration with some of the professional staff at the New York Federal Reserve Bank. They took the problem seriously enough to invite the CEOs of these financial institutions to breakfast with me at the Fed. Everyone was gracious but unmoved. They made it clear that they would not give up kicking the can down the road because, they explained to me patiently, as if I had not been a banker myself, if they didn’t underwrite this debt, there would always be some competitor who wouldn’t hesitate to do so.

On politicians

People called me an alarmist, a preacher of the apocalypse. The press gave my concerns and predictions fair coverage, but none of the other major players in state politics, including the unions and the financial services industry, was interested in changing course. Even the Republicans were silent; they knew that no matter how irresponsible the current practices were, they had engaged in the same practices when they were in power. After previous recessions, economic growth had saved us. It was convenient for Albany to pretend that in the future, as in the past, “the dog would talk.” Certainly all the political pressures encouraged that pretending.

The conundrum was this: Most state elected officials don’t go into politics to amass unbridled personal power. They are after a more complex kind of power that combines local influence, the feeling of being at the center of events, and the ability to work the levers of government to get things done. Those tasks usually involve benefits that cost taxpayers money. Elected state officials do not expect to have their fingers on the nuclear button, but they do expect to be able to deliver benefits to their constituents.

This is a good thing; it is the definition of democratic responsiveness. But consider what happens when these politicians can no longer deliver benefits because the discretionary pot is no longer growing but shrinking. In this case, elected officials must allocate not benefits, but pain. In some states, this situation does not produce shock; these are the states in which the dominant political culture values austerity and fiscal rectitude. But where these values are not dominant -- which in New York they certainly are not -- the political system struggles like a powerful fish on a line to avoid prudent, responsible actions that show concern for the future as well as the present.

To generate the political energy to change this pattern, you need a dramatic crisis, or at least the sense of a crisis. The conundrum for me was that New York’s political system was skillfully engineered to keep the crisis from occurring, even as the underlying problems grew worse.

On the current state of state budgets

Because of the degree of state autonomy, differences in the states’ demographics, history and politics make for significant differences in state fiscal situations. States with more poor citizens face larger pressures to enact programs to benefit these citizens. States with strong public employee unions face greater pressure to enact generous public pensions and other benefits. In states where opinion is heavily influenced by cosmopolitan elites, political fashions among these elites will heavily influence public policy. In states with a history of fiscal discipline, politicians develop assumptions conducive to discipline and transmit them to other politicians.

These differences in political cultures and institutions make big differences in states’ abilities to deal with the fiscal pressures. But we found that in recent years, the pressures common to states have grown powerful enough to threaten to overwhelm the capacities of even those states whose political systems are competent and resilient. And states are reacting to these pressures by avoiding them, using every available device to kick the can down the road.

Forty years ago, after we emerged from the New York City financial crisis, we told each other, “Never again.” I never thought I would once more see the same fiscal gimmicks being used for the same purpose, obscuring the gap between recurring expenditures and recurring revenues. But here they were, multiplied.

On democracy and the future of state and local budgets

Detroit, Michigan, is in bankruptcy as this book goes to press. But all bankruptcy means is that a federal judge will allocate Detroit’s inadequate resources between citizens who lent the city money in good faith and employees who worked for the city in good faith. No matter how Solomonic the allocation, it will not rebuild the city’s tax base. Does Michigan have a responsibility in rebuilding the base? Does it matter that Detroit’s bankruptcy has raised borrowing costs for governments throughout the state? Does the federal government have an obligation to help in the rebuilding? If so, how could it possibly afford to do the same for all the other states and localities in trouble?

The same questions apply to hundreds of states and localities. As I’ve noted, Philadelphia’s school district had to borrow to open its schools for the year. Colorado has announced that adequately funding its pension system would cost $15,000 for every taxpayer in the state. New York’s upstate cities are squeezed between state-imposed caps on the property tax, one of a city’s few sources of revenue, and the state and federal mandates that govern the services these cities must provide. Even New York City, for all of its fiscal advantages, has $100 billion in unfunded retiree health-care obligations.

After the crisis that threatened to decimate the U.S. financial system, federal legislation established the Financial Stability Oversight Council, tasked with examining and trying to mitigate the systemic risks to our financial institutions. Yet there is no risk to our institutions that is more systemic than the multiplying and spreading fiscal trouble of the nation’s states and localities. The federal government -- in the end, a president -- must assume some responsibility for the issue, not by writing a check but by using the resources of the federal government to provide the discipline and incentives that will force state and local governments to address their own fiscal future.

This may sound like a tall order, but there is really no acceptable alternative. I was born in the year when Franklin Roosevelt became president and have lived through a time marked by some of the country’s greatest public achievements. We emerged from the Great Depression. We won a World War. We overcame racial segregation. We survived the threat of nuclear Armageddon and saw the demise of the Soviet system that produced it. In comparison, the issues we fact today are a piece of cake -- if people will participate in the democratic political process. Politics remains the only way problems like these can be solved in a democracy, but making the political process work better tomorrow that it does today depends on the willingness of good men and women to give part of their lives to participating in it.

A Senior Editor of Governing, Jonathan has been covering state and local public policy and administration for more than 30 years.
Special Projects