To close its $3.8 billion FY 2010- FY 2011 projected budget gap, Oregon has relied on an evaporating stimulus, budget cuts of roughly 9 percent and tax increases. The state’s income tax was raised with a new top rate of 11 percent. However the tax on the richest two percent of residents hasn’t performed as expected. Last year the new tax rate brought in $180 million. This year collections dropped to $130 million. The Wall Street Journal writes this shouldn’t be suprising. A full quarter of “rich tax filers seem to have gone missing.” it’s likely millionaires will be looking for other places to domicile. The tax applies to stocks and capital which means Oregon has “virtually the highest capital gains tax in North America.”
This week I had the opportunity to discuss Camden’s budget troubles on The Alyona Show. Walt Whitman called it “a city invicible” but after the loss of its manufacturing base over sixty years ago the city never really recovered. Heavily subsidized by the state of New Jersey, Camden has also been plagued by corruption scandals, high unemployment and high crime, and an abysmally-performing school district. The state took over Camden’s finances in 2002. Camden continues to receive a significant amount of aid, but the city council says it has no choice and has to cut from the fire department and the police force.
What’s in Camden’s proposed $138 million budget that makes these cuts necessary? The most recent posted budget is for FY 2008, before the stimulus arrived.
Calling it “simplistic, crass and riddled with errors,” many faculty at Texas A&M are unhappy with the university’s approach to measuring professor value via a balance sheet. The faculty member is assessed by how many classes they teach, the tuition they bring in, and the research grants they generate.
But metrics can be misleading. James Joyner at OutsidetheBeltway puts it well. “Research grants obtained” might make sense in the hard sciences but not so much in philosophy departments. And how does a professor “generate tuition?”
The pressure to measure professor profitability comes from state legislatures and education consumers. In total states spent $78 billion in FY 2008 on universities (11% of budgets).The Wall Street Journal writes that tuition continues to climb yet, employers complain new hires with four-year degrees lack basic skills.
There’s alot going on here. What do individuals seek from a university education? Better jobs, workplace skills, or the pursuit of knowledge for its own sake? A professor who is training students for in-demand professions may bring in more “customers,” than one offering courses in Classical studies. Given economic, social and technological change what is the future of the university and of academia? Three things generating a lively debate: Tenure, technology, and the decades-long transformation of curricula.
James Surowiekci writing at The New Yorker considers whether there is good reason to think California’s fiscal plight puts it on course for a Greek-style collapse. Greece is not the only EU nation in trouble. Add in Portugal, Ireland, Italy and Spain to the massive debt club (a.k.a the PIIGS), with debt levels at 60% of GDP in 2008-2009. By contrast the most fiscally troubled states of California, New York, New Jersey and Illinois had debt-to-GDP ratios of 15% during the same period.
Surowiecki suggests this may be reason to breathe a little easier. The biggest debtor nations in the EU owe three times as much relative to GDP as do their high-debt counterparts in the US. Plus, the states can count on a federal bailout.
Yet, neither of these thoughts are entirely comforting.
First, states have underestimated their pension obligations by threefold. Official reports estimate New Jersey’s unfunded pension obligations at $45 billion. Using more reasonable discount rates to estimate New Jersey’s pension obligation reveals an unfunded liability of $137.9 billion, or 261% of total state debt. That’s before adding in Other Post-Retirement Benefits (OPEB) and health care for public sector workers.
Secondly, a half century of intergovernmental infusions from D.C. in the form of transfers,Medicaid, and stabilization money hasn’t kept the states afloat. Quite the contrary the erosion of fiscal federalism has meant a loss of states’ control over spending and policy.
The FY 2009 stimulus has been as effective as a shot of morphine. States have now spent their education money to expand spending and avoid cuts. Fast forward to FY 2010. Revenues haven’t recovered. Pension obligations loom larger and those “saved and created” jobs are now in search of funds.
Reliance on fiscal gimmicks and stimulus funds have done no favors for state budgets. FY 2010 promises to be worse than last year. The National Governors Association reports states face budget deficits amounting to $134 billion over the next three years. Bob Williams writes only three governors appear to showing leadership on the issue: Indiana Governor Mitch Daniels, Virginia Governor Bob McDonnell, and New Jersey Governor Chris Christie. The reverse can be said for California. Governor Arnold Schwarzenegger has praised the stimulus for creating 150,00 new jobs in his state. As Veronique de Rugy points out, those are primarily taxpayer supported public sector jobs. For economic recovery to occur jobs must be created in the private sector. And there has been very little of that. California’s unemployment rate remains at 12.4 percent.
Present state budget crises will likely seem mild compared to what they will face in F Y2011. In order to comply with their constitutionally mandated balanced budgets, many states relied on one-time gimmicks to pass their FY 2010 budgets and must now turn to even more drastic measures.
In California, Governor Schwarzenneger’s proposed solution to close a $19 billion dollar funding gap is to rely on $8 billion of hoped-for federal aid. This prediction was deemed overly optimistic by the state’s Legislative Analyst’s Office. However, that Gover Schwarzenneger is relying on federal funding at all should signal that the states’ “one-time” federal bailout last year has created a culture in which state legislators look to higher levels of government to fix their fiscal irresponsibility.
The current state budget problems exemplify the danger of fiscal gimmickry: one-time solutions allow states to pass their budgets when the crunch hits, but they create long run problems as the structural gaps between spending and revenue grow over time. Continue reading
The LA Times reports that in spite of 40,000 job cuts and billions in cost-saving measures, the U.S. Postal Service lost $3.8 billion in FY 2009, which is $1 billion more than they lost in FY 2008. The USPS’ financial health is “sobering” to quote Postmaster General John Potter. Decreased mail volume coupled with “the impossible demands” of pre-funding future health retiree benefits. The short-term worry, by September 1, 2010, the USPS must make a payment of $5.5 billion for its retirees. The longer-term reality: e-mail or “electronic diversion” have taken a huge bite out of mail volume.
To address the immediate-term, like other “too-big-too fail” entities, the USPS has gotten a reprieve. In October, Congress allowed them to defer contributions to its health care plan.
To address the other matter – technology’s effect on the market for snail mail – there is only one way out of the USPS’s dilemma: “Free the Mail”, as CATO’s Tad DeHaven and Chris Edwards note . But, there’s a big obstacle in the room – public sector unions.
State budget cuts mean prison shutdowns — 17 prsions to be shutdown throughout the U.S. in FY 2010
Will Rhode Island criminalize “indoor prostitution?”
Crazy ants spread through the Gulf Coast
Massachusetts experiences first wave of jobless workers with exhausted benefits — 2,500 workers lose aid
Women in Connecticut boost gun sales — 90 percent increase in gun permits between January and May
Most states have closed the books on FY 2009 — just barely. July marks the start of the FY 2010 for many states, but as the Washington Post reports, just six weeks in a dozen states are short by a total of $24 billion. This year is certain to be a repeat of the last — only much worse, with revenues unlikely to recover in the short-term. Some of the budget balancing tactics of last year are depleted. Reserve funds are empty. And at least half of the federal stimulus has been spent.
With the choice between further tax hikes or budget cuts (or both), it’s likely that many states will choose something FY 2009 saw a great deal of, budget gimmicks. But these also have a cost. While deferring pension payments, eliminating property tax rebates, or taking out a line of credit to balance the budget may have seen New Jersey through July 2009, it was enough for Moody’s to downgrade the state from a “stable to a “negative” credit rating.
Moody’s credit review was prompted by New Jersey’s planned issuance of $200 million in school construction bonds. New Jersey’s bleak fiscal picture isn’t an overnight occurrence. The state’s steady march to insolvency dates back decades and is driven by many things, including the tripling of taxpayer-supported debt since 1990 to $45 billion (most of it not approved by taxpayers). According to the New Jersey Taxpayers’ Association’s Misery Index, taxpayers have felt the increasing pressure of runaway government spending for a decade.
The federal bailout may have gotten New Jersey through part of its budget ordeal — but it has not stopped the state from the mistakes that brought it to the brink. In considering how to tackle the coming year elected officials must break with the habits of the past, increased spending supported by ever-increasing taxation.
New Jersey begins its fiscal year today. FY 2010 will usher in a host of new taxes on cigarettes, alcohol, incomes, and insurance premiums. Here is the Star Ledger‘s rundown of what those hikes will look like for taxpayers.
California is issuing IOUs to its creditors and is now the state with the worst credit rating in the country, according to the Financial Times.