September 18, 2014

Growing Fiscal Pressures on the States

State governments face severe fiscal problems that threaten their ability to meet their obligations to citizens, public employees and creditors, according to a report released last week by the State Budget Crisis Task Force.

“The conclusion of the Task Force is unambiguous,” warned Paul A. Volcker and Richard Ravitch, the panel’s co-chairs. “The existing trajectory of state spending, taxation, and administrative practices cannot be sustained. The basic problem is not cyclical. It is structural.”

Volcker is a former Federal Reserve chairman who also serves on The Concord Coalition’s Board of Directors. Ravitch is a former lieutenant governor of New York. The task force of budget experts focused on six heavily populated states -- California, Illinois, New Jersey, New York, Texas and Virginia – but said other states had similar problems.

The report emphasizes the connection between the fiscal difficulties facing the federal government and those confronting the states, warning that “the federal budget crisis will have serious spillover effects on state and local governments.”

The task force identifies five other key fiscal threats for states: Medicaid spending growth, underfunded retirement promises, narrow and eroding tax bases with volatile revenues, fiscal stress in local government, and state budget laws and practices that “hinder fiscal stability” and mask imbalances.

Recommended solutions include greater transparency in government, more multiyear planning, state tax reform, more responsible management of pension plans and “prompt attention” to the possible effects of federal deficit reduction on the states.