Finance

The Financial Road Ahead

The state of the union, and four positive steps states can take to improve their fiscal outlook.
by | November 10, 2010
 

When New York's Lt. Gov. Richard Ravitch finally got the microphone -- he was the last of five speakers at the Urban Institute's Nov. 2 conference on the Challenges for New Governors -- he kicked off his remarks by saying, "Compared to me, you've just heard from a group of optimists."

That wasn't just a casual icebreaker. Ravitch followed Ray Scheppach, executive director of the National Governors Association, who talked about entrenched state structural problems that included tax collection systems that are antiquated, expenditures that are unsustainable and a downturn "so deep and broad that there will be repercussions through state governments for a decade."

Kim Rueben of the Urban-Brookings Tax Policy Center, Robert Lerman, the Urban Institute's fellow in labor and social policy, and Edward Montgomery, dean of Georgetown Public Policy Institute, had equally negative assessments of what lies ahead for states. They discussed high unemployment rates, $1 trillion in public pension liabilities, tepid economic growth and no meaningful recovery for state revenues for, at a minimum, two to three years.

Ravitch, however, was the only speaker on the panel who's currently in state government. Here's his assessment -- pessimistic as promised -- of where we stand, followed by forward-looking suggestions from several of the panelists on positive actions states can take.

Ravitch on Where We Are Now

Fundamental mistake: The economic downturn that started in 2008 was not just another cyclical recession. "Cheap money and availability of credit masked the fact that our economy has been in a decline for the last 20 years. When the credit bubble burst in 2008, it exposed the reality of what has been going on all along: Americans were buying things with their homes, buying the basic necessities of life with borrowed money."

Unbalanced budgets: In New York and elsewhere, states have balanced their budgets but only in the sense that "they have enough cash to pay their bills next month by selling assets and borrowing money." That approach is reaching its limits. "Larger states are running out of assets to sell and revenue streams to hypothecate," or to pledge as repayment for a bond.

Misguided assumptions: States continue to patch things over on the assumption that "either the dog will talk, or we'll soon be out of a recession and revenue growth will resume."

Passing the Buck: "What states are doing now is pushing government programs and expenditures down to localities. And localities are now struggling with the same set of choices: how to borrow money and what assets to sell to balance budgets."

Expectations: "If you believe that the rate of growth of our economy is going to be the average rate it was in the prior two decades, then there's justification for kicking the can forward and using borrowed money for today's expenses. If you don't believe growth is going to be that great, then you have to ask yourself some fundamental questions about what the federal system is all about." Neither Ravitch nor his fellow panelists believe a great rate of growth will return any time soon.

The Fundamental Questions: "We live in a rapidly changing world. For people of my generation, it requires that we question every assumption we made about what is good and worthy in public expenditures and the relative merit or costs of paying benefits. These are words I never would have heard myself say 20 or 30 years ago. Everyone in the whole economic system is going to have to put some skin in the game to avoid a real catastrophe for the federal system."

Positive Steps to Take

Help from Abroad: Georgetown's Edward Montgomery suggested tapping into foreign capital. "It's an untapped resource. It's a corollary of the initiative on exports, which is, how do we get foreign companies to grow here? A lot of money that the Department of Energy put out for wind turbines and green manufacturing attracted foreign companies to locate here. The Southern auto strategy is all about attracting foreign companies." Several governors are on the case. Michigan's Gov. Jennifer Granholm, for instance, went to South Korea last week for a three-day trade mission to encourage advanced battery manufacturers to invest in Michigan.

Help at Home: The Urban Institute's Robert Lerman suggests one way to make a dent in the jobs problem is to set up apprenticeship programs, letting young people get post-secondary training. "A lot of learning takes place on a job, and there is much greater transparency about what job ladders look like. Governments should be able to attract support from labor and business. States that have these programs today are very satisfied with them, and the companies that offer the programs are very satisfied."

Squeeze Agencies: Ravitch makes the case for consolidation, using an example from New York State. "We have 650 school districts. Each one of them has a transportation commission, even though some of them don't even have a school bus. But no one wants to give up power to confer jurisdiction to a broader authority. It's the most inefficient system in the world. We can't afford it anymore."

Best practices: Ray Scheppach mentioned a National Governors Association report, State Government Redesign Efforts 2009 and 2010, which looks at government areas that some states have tried to make more efficient and less costly. At least 18 states have reorganized agencies; more than 20 states have altered employee compensation, including enacting pension reforms.

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