A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.
That is the beginning of a new report by Iris Lav and Elizabeth McNichol of the Center on Budget and Policy Priorities.
A lot of people in policy circles like to draw a distinction between the short and the long run. For some, the idea is that the long run is when we should deal with fiscal problems, but in the short run, we can’t afford not to spend. In my view, this allows people to appear sober-minded about the long-run fiscal problems of the states while endorsing more reckless decisions today.
This is an old idea (“in the long run we are all dead,” said Keynes, dismissively). But I think it has become increasingly dangerous. Politicians have every incentive in the world to think about today and very little incentive to worry about tomorrow (and according to the GAO, the states’ long-run problems are quite significant, requiring spending cuts or revenue increases of 12.3 percent, sustained for the next 50 years).
A few months back, I wrote a paper examining the factors that contributed to large state budget gaps during the Great Recession (I actually used CBPP’s data on the size of the gaps). Among other things, I found that the size of a state’s gap in FY2010 was positively related to per capita spending growth over the 2 decades that preceded the recession. I take this as some evidence that the short and the long-run are pretty tightly-connected and a failure to focus on fiscal problems in the short run can manifest itself in pretty serious problems over the long haul.
Jeff Dircksen at the National Taxpayers Unionwrites about a new ranking of state governments:
There’s a new ranking that looks at how well states are run, or in some cases not so well run. According to its web site, “24/7 Wall St. has completed one of the most comprehensive studies of state financial management ever performed by the mainstream media. It is based on evaluation principles used in the award-winning Best Run States In America ratings published by the Financial World Magazine during the 1990s. These studies were used by state governments to evaluate the efficiency of their own operations. The new 24/7 Wall St. study is meant to help businesses and individuals examine state operation with an unbiased eye.”
Take a look and see how your state does. Spoiler alert: Wyoming is the best and Kentucky is the worst.
On an unrelated note, Joe Henchman at the Tax Foundation cautions against the use of the Center on Budget and Policy Priorities’ state budget gap data (note: I used this data in my paper on budget gaps—in part because it was timely and because it is so commonly cited). Joe writes:
The number is probably accurate from their methodology, but is ultimately meaningless. Here’s why:
A state “budget deficit” is the revenue projected (usually by the Governor’s office) minus hoped-for spending according to some formula, in the initial budget plan. For instance, say a state raised and spent $10 billion this year, but wants to spend $20 billion next year, projecting $11 billion in revenues. Ultimately they settle on spending $11 billion. That state has “closed a $9 billion budget deficit” even though revenues and spending are up from the previous year.
The exact method of estimating next year’s spending varies by state, with some starting with last year’s budget while others throw in additional wish list programs. Adding up all the states’ numbers is adding apples and oranges.
States must balance their budgets so there really is no cumulative state budget deficit in the end, at least on paper.
It’s routine for states to want to spend more than they actually can, at least at first, and having a deficit in the initial plan happens even in flush times. Thus, CBPP’s numbers overestimate the scope of actual state budget deficits.
CBPP also presents the deficits as a percent of each state’s general fund. While the general fund is usually the largest and most important part of a state’s budget, in many states it can represent less than half of the total budget. This number thus exaggerates the seriousness of a budget deficit.
A budget deficit could exist because of overly ambitious spending plans that are whittled down to reality, overly optimistic revenue projections, fiscal irresponsibility, or structural imbalance. CBPP’s tale of the recession causing everything and federal aid being the only salvation doesn’t fit the facts. For instance, California’s deficit this year includes unpaid bills kicked over from last year, so it’s the same money being double-counted. This irresponsibility is glossed over in CBPP’s report.