Budget Task Force Highlights 6 Threats to States

Study led by government veterans warns of "calamity" for states if federal deficit reduction goes too far.
by | July 17, 2012 AT 5:50 PM

A new task force led by former New York Lieutenant Gov. Richard Ravich and former Federal Reserve Chairman Paul Volcker warns of calamity for states if they continue on their financial trajectory and highlights six threats to their stability.

The study, released at an event in Washington Tuesday, doesn't break much new ground. But members of the task force say it's valuable to assemble the wide range of fiscal issues into a single report.

According to task force, which includes other experts on municipal finance, the most significant pitfalls facing states include:

  • the growing cost of Medicaid
  • underfunded pensions
  • a shrinking and volatile tax base
  • federal deficit reduction efforts
  • fiscal distress among local governments
  • state budget laws that mask problems and hinder stability

Those challenges have been well-documented by Governing and many other observers. Officials with the task force hope the report will have an impact beyond those who already recognize those issues. (View the full report here and a summary here)

"The existing trajectory of state spending, taxation, and administrative practices cannot be sustained," the group writes. "The basic problem is not cyclical. It is structural."

The task force addressed sequestration, the major federal spending cuts to domestic discretionary spending set to take effect in January. Many in state and local government fear the effect those cuts will have on grants and other funds they receive from the federal governments. Federal grants made up 32 percent of state revenue in 2009, according to the report.

The task force writes that efforts to reduce federal budget deficit "could wreak havoc on states."

Members were also skeptical of the impact that changes to the federal tax system, especially the potential reduction of the tax-exemption for municipal bonds, could have on state and local finances. The task force calls for some sort of formal mechanism to evaluate the impact proposed federal policies have on states. That doesn't currently exist in the federal government.

The task force doesn't let states off the hook either. It calls on states to better utilize counter-cyclical tools like rain day funds to weather future financial challenges. States are still slogging through the wake of the recession, and many have still not returned to pre-recession revenue levels.

The report is also critical of states for using temporary resources to close budget gaps, like asset sales and hidden borrowing. Those steps can balance budgets but aren't sustainable in the long-term, according to the authors.

The report goes on to call for greater transparency in state budgeting, arguing that the financial statements released by states come out too late and can obscure pension and benefit liabilities, masking the extent of some state budget challenges.

The study focuses on six large states in particular: California, Illinois, New Jersey, New York, Texas, and Virginia.