New Study Highlights State Budget Problems

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When state and local governments run into serious financial problems, they often turn to Washington in search of possible solutions. So with the federal government already on an unsustainable fiscal path, a new report raises troubling questions about many state budget practices around the country.

The report expressed particular concern about “legacy costs,” which include retirement obligations for public employees and retiree health care.

“Legacy costs include more than $1 trillion in unfunded liabilities accumulated in state and local public worker pension programs, plus at least $600 billion in (other retiree benefit) obligations,” said The Volcker Alliance, the nonpartisan organization that recently released the report.

The founder and board chairman of the organization is Paul A. Volcker, a former chairman of the Federal Reserve. Volcker also serves on The Concord Coalition’s Board of Directors.

The report is titled “Truth and Integrity in State Budgeting: What is the Reality?” The study was conducted in partnership with dozens of professors and graduate students at 11 schools of public administration or policy. It covered Fiscal 2015 through last month.

The alliance graded states from “A” to “D-minus” in legacy costs and four other categories: budget forecasting, budget “maneuvers,” reserve funds and transparency.

On legacy costs, for example, eight states had a three-year average grade of A while nine states received a D-minus.

The alliance also warns: “Maneuvers used by some states to create the appearance of balance may disguise structural gaps between revenues and expenditures that will reappear in subsequent budgets.”

The report said that with state and local expenditures equaling more than a fifth of the Gross Domestic Product, it is “essential that such expenditures are as transparent as possible, funded responsibly, and not left for future generations to shoulder.”

The study’s warnings have an all-too-familiar ring for anyone familiar with budget gimmicks, buck-passing and irresponsible fiscal policies at the federal level.

State budget problems could compound the difficulties younger Americans and future generations may face as the result of inheriting an enormous federal debt. In addition, retirees who do not receive promised state benefits in the future may well result in additional pressures on the federal budget.

On the positive side, the new study recommends a number of best practices for state governments. For example: States should pay for expenditures in the same year they are accrued, consistently contribute necessary amounts to pension funds, and enact clear policies for withdrawals from rainy day funds and other fiscal reserves.

These best practices deserve careful study in state capitals around the country.

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