States need to act on long-term budget crises: report

A new report out Tuesday concludes that six major U.S. states will face mounting fiscal crises as healthcare spending continues to spiral out of control and the federal government tries to rein in its own budget deficit in the coming years.

The non-partisan State Budget Crisis Task Force looked at California, Illinois, New Jersey, New York, Texas and Virginia.

“The threats and risks vary considerably from state to state, but the storm warnings are very serious,” task force chairmen Paul Volcker and Richard Ravitch said. “The costs, whether in service reductions or higher revenues, will be large. Deferring action can only make the ultimate costs even greater.”

“The conclusion of the Task Force is unambiguous. The existing trajectory of state spending, taxation, and administrative practices cannot be sustained. The basic problem is not cyclical. It is structural. The time to act is now,” they added.

Volcker is credited with ending the stagflation of the late 1970s as federal reserve chairman, and Ravitch was instrumental in bringing saving the New York State Urban Development Corporation during that period.
 
The report’s findings are not entirely unexpected.

It finds that Medicaid cost growth will exceed revenues and that pension funds in the states could be underfunded by $3 trillion or more.

It also points out that sales taxes are being eroded as transactions move online and gas tax revenue is being reduced as vehicles use less gas.

Meanwhile, states have put off improving crumbling infrastructure, which will have to be fixed eventually. On top of this, efforts to curtail grants or expand taxes on the federal level could push the states further over the brink.

“When the federal government takes significant action to reduce its budget deficit, such action could wreak havoc on the states,” the report adds.

The report has a slew of recommendations on increasing transparency and ending state budget gimmicks as a first step toward averting the crisis. Even though states require a balanced budget, many are using tricks such as counting future revenue to pay for current spending, masking the extent of the problem.

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