Jul 28 2012

Report Warns California Fiscal Crisis Will Persist

High Profile Task Force Predicts State’s budget will lag as US Economy Rebounds-

Former Federal Reserve Chair Paul Volcker and former New York Lt. Gov. Richard Ravitch warned that the fiscal crisis will persist long after the economy rebounds as states continue to confront rising health care costs, underfunded pensions, infrastructure needs, and eroding revenues.  Volcker and Ravitch presented the sobering findings of their task force at a press conference in Washington, DC. on Tuesday, July 17.

The “Report of the State Budget Crisis” noted significant problems.  States have not set aside enough money to cover the health and pension benefits owed to public workers.  Important revenue sources have eroded: housing values are falling and state sales tax dollars are decreasing due to internet sales and shifts in consumer spending services.  As states cut aid to schools and universities, Medicaid spending is growing faster than state revenues and now represents the biggest share of state spending.

Since it was not feasible to study all 50 states, the task force chose six states—California, Illinois, New Jersey, New York, Texas and Virginia—for in-depth, on site analysis.  All the states studied have relied on some budget gimmicks in recent years.

“Budget gimmicks and inadequate reporting mask and encourage fiscal problems, and make them more difficult to solve.  While none of our states is on the brink of financial collapse, these threats loom large.”

Major fiscal threats identified:

  • Medicaid Spending Growth Is Crowding Out Other Needs
  • Federal Deficit Reduction Threatens State Economies and Budgets
  • Underfunded Retirement Promises Create Risks for Future Budgets
  • Narrow, Eroding Tax Bases and Volatile Tax Revenues Undermine State Finances
  • Local Government Fiscal Stress Poses Challenges for States
  • State Budget Laws and Practices Hinder Fiscal Stability and Mask Imbalances

The report concludes:

“State finances are not transparent and often include hidden liabilities as well as rapidly growing responsibilities, which are difficult to control. While state revenues are gradually recovering from the drastic decline of the Great Recession, they are not growing sufficiently to keep pace with the spending required by Medicaid costs, pensions, and other responsibilities and obligations. This has resulted in persistent and growing structural deficits in many states, which threaten their fiscal sustainability.”

Task Force Recommendations:

The report recommendations include multi-year budgeting, better use of “rainy day” funds and moving away from cash-based budgeting, increased pension contributions and prevention of pension abuses such as “double-dipping” (where a person draws a pension while also receiving a government salary) and “spiking” (where a person artificially inflates their final year’s earnings in order to increase their pension).

Similar issues and recommendations have been the subject of recent discussion in Piedmont by the 2011 Municipal Tax Review Committee and the Budget Advisory and Financial Planning Committee.

LINKS:  Read the summary.  Read the complete report.


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