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Thursday, July 19, 2012

The Fiscal Crisis of the States

In June 2011 former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Chairman Paul A. Volcker assembled a State Budget Crisis Task Force to examine fiscal threats to California, Illinois, New Jersey, New York, Texas, and Virginia. Among the findings:
Certain large expenditures are growing at rates that exceed reasonable expectations for revenues:
Medicaid programs are growing rapidly because of increasing enrollments, escalating health care costs and difficulty in implementing cost reduction proposals. At recent rates of growth, state Medicaid costs will outstrip revenue growth by a wide margin, and the gap will continue to expand.Pension funds for state and local government workers are underfunded by approximately a trillion dollars according to their actuaries and by as much as $3 trillion or more if more conservative investment assumptions are used.• Unfunded liabilities for health care benefits for state and local government retirees amount to more than $1 trillion.
The capacity to raise revenues is increasingly impaired:
• Untaxed transactions are eroding the sales tax base. Gasoline taxes are eroding as well, making it more difficult for states to finance roads, highways, and bridges.
• Income taxes have become increasingly volatile, particularly during and after the recent economic crisis.
The federal budget crisis will have serious spillover effects on state and local governments, and state actions will have spillover effects on local governments: 
• Cuts in federal grant dollars, lower spending on federal installations, procurement, and infrastructure, and potential changes to the federal tax code all threaten states’ fiscal stability.
• Pressures on local governments, caused by the weak economy and cuts in state aid, are constraining education spending, law enforcement, aid to the needy, and the institutions that make up the culture of our cities. Local government cuts pose a significant risk to the overall economic and social fabric of states.