« links for 2010-12-20 | Main | "The Effect of Falling Home Prices on Small Business Borrowing" »

Tuesday, December 21, 2010

State Budgets

Nicholas Johnson of the CBPP sets the record straight on state finances:

Some Right, Some Wrong in “60 Minutes” Story on State Budgets, CBPP: Last night’s CBS "60 Minutes" piece on state budgets made some important points but also — through some big mistakes and omissions — gave a deeply misleading impression of the state budget situation.

Here’s what it got right:

  • As correspondent Steve oft put it, “The ‘great recession’ wrecked [states’] economies and shriveled their income.” State revenues are about 12 percent below pre-recession levels, after adjusting for inflation, yet the cost of basic services like education and health care — the two largest areas of state and local spending — is rising.
  • The real pain from states’ current fiscal problems has been visited on the most vulnerable people, from low-income families needing medical care in Arizona to recipients of mental-health assistance in Illinois. That’s because states are required to balance their budgets — they cannot borrow to cover operating expenses. States have responded to the loss of revenues, in part, by cutting health care services and payments to nonprofits that serve the needy.
  • Fiscal year 2012 (which will begin next July 1 in most states) will be the most challenging year yet for state budgets. States have largely drawn down their reserves, revenues are still depressed, and emergency aid from the federal government (hardly the “bailout” CBS suggested, but rather a way to keep more people working and protect a fragile economic recovery) is expiring.

Here’s what "60 Minutes" got wrong:

  • Contrary to Kroft’s claim, states aren’t guilty of “reckless spending.” Total state and local spending, not including federal grants, is no larger now as a share of the economy than it was 20 years ago, according to U.S. Bureau of Economic Analysis data. (Federal grants to states have grown over this period to cover rising state Medicaid costs that result from health care inflation and a rising number of families without private health insurance.) State general fund spending in 2011 will be 6 percent lower than it was in 2008, without adjusting for inflation...
  • Underfunding of state and local pension funds did not cause states’ current fiscal problems and is not an immediate crisis. To be sure, some states have failed to make required pension contributions, including New Jersey (which in past years chose instead to cut taxes) and Illinois (which has a chronic revenue shortage due to political gridlock over modernizing its tax system). Nevertheless, the Center for Retirement Research at Boston College estimates that states and localities could restore pension systems to health by raising their contributions moderately once their revenues recover from the recession and/or by adjusting benefits, retirement ages, and similar policies. Many states are already starting to do both.

Most importantly, the "60 Minutes" story left the impression that states are so out of whack that there are no reasonable solutions to their financial problems. In reality, states have successfully closed s several hundred billion dollars in budget gaps over the last three years through spending cuts and tax increases, a point the story overlooked. ...

    Posted by on Tuesday, December 21, 2010 at 12:15 AM in Economics | Permalink  Comments (30)


    Feed You can follow this conversation by subscribing to the comment feed for this post.