Belt-Tightening for the Pantless

From coast to coast, statehouses are talking the balanced-budget talk, and wondering how to walk the walk

Should you decide to shell out a great deal of gas money this summer and travel the country, may we propose a theme trip: a tour of unhappy statehouses. You’re likely to find that each state is unhappy in its own way, but that ours is perhaps unhappiest of all.

Nevada is facing a projected shortfall of as much as $3 billion in the upcoming biennium. The percentage gap between revenue and expected expenditures is about 40 percent—biggest in the nation, according to the National Conference of State Legislatures. Unfortunately, in Nevada, as elsewhere, the low-hanging fruit has already been picked—closing down a park, axing small programs few will miss. Now larger cuts, ranging from education to human services, are on the cutting block. Even these are unlikely to be enough.

Nevada may be an exception in the gory details, but it can take solace that it is hardly alone in the broad themes of this year’s budgetary drama. The showdowns in legislatures across the nation seem destined to play out along rigid ideological lines of tax increases versus spending cuts instead of more pragmatic ones. While the arguments rage on, economies remain weak, costs continue to rise and the one-time boost of last year’s federal stimulus funding becomes a more distant memory every day. According to the Center on Budget and Policy Priorities, of the 46 states that have released budget proposals, 39 project that they will have less state revenue in 2012 (after adjusting for inflation) than they did in fiscal year 2008, when the recession began.

Collectively, states face budget gaps totaling nearly $10 trillion in the next 50 years, says Matthew Mitchell, a research fellow at the Mercatus Center at George Mason University. To cover it would require either a 12 percent reduction in spending or an equivalent increase in revenue. “What states have been willing to do is to cut their general funds by about 6 or 7 percent … a little bit more than half of what is necessary.” But some states are thinking—and working—hard to deal with the crisis. Kil Huh, director of research at the Pew Center on the States, notes that in 2009, states raised taxes collectively by about $29 billion, the biggest increase in 50 years, and a CBPP report released last month charts the handful of governors that have proposed revenue increases. In California, Gov. Jerry Brown has called for increasing income tax, sales tax and vehicle license fees. Connecticut Gov. Dan Malloy has pushed for increasing the number of income tax brackets. Minnesota would levy a property tax charge on houses valued at more than $1 million. North Carolina has floated extending a temporary sales tax hike. Lincoln Chafee, the governor of Rhode Island, has proposed taxing previously untaxed goods and services, including cab rides, show tickets and over-the-counter pharmaceuticals. And in Hawaii, there’s a plan to tax soda.

Of course, many states are also trying to sweep their fiscal problems under the rug. Sheila Weinberg, who runs the Institute for Truth in Accounting near Chicago notes that North Carolina has proposed balancing its budget by borrowing money; in New Jersey, Gov. Chris Christie proposed not paying contributions into pension plans; and Illinois simply stopped paying its bills—or else moved money around in dozens of government funds, only a few of which have to be balanced.

In Wisconsin, a contentious law that would prohibit government workers from collective bargaining actually sent state legislators into exile in Illinois (the law has been temporarily blocked by a Wisconsin judge). That state, says Weinberg, is in “a horrible position because they’re using real numbers to balance the budget,” she says. “The other states are not using real numbers, which is why they’re not running into real troubles yet.”

So far, Nevada Gov. Brian Sandoval has rigorously kept to his promise of not raising taxes to balance the budget. Nevada Democrats seem to be moving toward some kind of tax increase. But they have yet to put forth a specific plan. The dance between the two sides reveals that the ongoing budget battles in states really boil down to a question of ideology: Is it better to raise taxes or cut spending?

There are apparently no easy answers. The CBPP points to a 2001 article on its website by the economist Joseph Stiglitz that argues tax increases harm the economy less than spending cuts in the short run. The reason, he writes, “is that some of any tax increase or transfer payment reduction would reduce saving rather than consumption, lessening its impact on the economy in the short run, whereas the full amount of government spending on goods and services would directly reduce consumption.” In other words, when the government taxes you an extra dollar, you may only have planned to spend 90 cents of it and put the other 10 cents in savings. But the $1 taken out of a government budget may be a full dollar removed from the economy.

However, a theory called the Tax-Spend Nexus suggests that spending cuts—though they may hurt an economy in the short run—do a better job than revenue increases in dealing with deficits. The reason? As revenues rise, states tend to spend every cent, making it hard for them to fight their way out of deficits.

Clearly, both spending cuts and tax increases—not to mention serious discussion of retirement-benefit reform—will be necessary if states want to avoid making their current troubles worse. “The states are continuing to face very large shortfalls on the amount of money they’re taking in and the amount they need to meet the needs of state residents,” says CBPP policy analyst Phil Oliff. “Trying to solve those budget shortfalls through budget cuts alone is really counterproductive. States need to take a balanced approach, one that includes revenue and not just cuts to state services.”

Huh is optimistic that states may be getting the message. “From an analytic perspective, it seems states no longer were able to kick the can down the road; they essentially ran out of road,” he says. “They confronted budget challenges unlike any they’ve ever seen before. They knew they had to roll up their sleeves and get to work.”

Still, there’s an elephant in the room, nationally and here in Nevada: underfunded pensions and benefits for public employees. Most states—including ours—are essentially working with faulty numbers when assessing their budgets, according to Weinberg’s ITA, because they’re not including public employee liabilities on their books.

Weinberg’s group isn’t the only one concerned about pension plans. According to a report by the Pew Center on the States, states are facing a $1 trillion gap between the money they’ve set aside for employees’ retirement benefits and the cost of actually paying them out. The Pew Center will be updating its report in a few weeks with more current numbers, but Huh says this estimate is a conservative one—it came right before the crash in 2008, in which states, he says, subsequently lost 25 percent of their asset value.

Mitchell, the researcher at George Mason University, puts the figure even higher, claiming that collectively states are looking at about $3 trillion in unfunded pensions. “The longer-term budget crisis is so much worse than what we’re facing right now,” he says.

Nevada is one of 31 states with less than 80 percent of its pension plan funded, according to the Pew study, which puts Nevada’s figure at 72 percent. And an ITA report on Nevada argues that state politicians ignore pension costs since these benefits are not “immediately payable in cash: … As a result, the state set aside only 54 cents to pay for each dollar of these promised benefits.” In other words, the report alleges that the state is reporting liabilities of about $7 billion but has actual liabilities of $10.6 billion, because of $3.6 billion in unreported retirement payments.

Nevada State Controller Kim Wallin disputes the ITA conclusions. “They totally misstate the truth,” she says, noting that the ITA only focuses on the state. She says Nevada has 183 employers—meaning governmental agencies—participating in the state’s Public Employees’ Retirement System. “We are very adequately funded.”

But the only real success story on the budget front is Nebraska, Weinberg says. “They are ahead of the game. They have a positive taxpayer burden—they don’t have any taxpayer burden.” She says the state has $3.6 billion in assets it can use to meet its liabilities—this doesn’t include capital assets like infrastructure or assets restricted by law—and liabilities that only add up to about $3.1 billion.

But there really is no free lunch. Pensions in Nebraska, she says, are not as generous as in other states. They also don’t have retiree health care plans—workers do not retire until 65, and “they automatically go onto Medicare so the state doesn’t have any liability.”

Politics is not a calling for the pure. The budget battles in Nevada and elsewhere will only be resolved by leaders who are genuinely interested in solving problems through concession and compromise rather than earning points for sticking to their guns. Principles that won’t budge in tough times might be fine for philosophers or artists, but for political leaders they’re a sign of empty rhetoric. And there seems to be plenty of that going around.



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