Tracy Gordon is a Fellow in Economic Studies at the Brookings Institution. Her research is in state and local public finance as well as political economy and urban economics. She is also an affiliated scholar at the Urban Institute and an Adjunct Fellow at the Public Policy Institute of California.
A few years ago, it was fashionable to compare California, Illinois, or whatever U.S. state was struggling financially to the troubled island nation of Greece. Now, with Stockton, California the largest U.S. municipality to enter bankruptcy, it may be tempting to make another Mediterranean comparison – this time to the troubled island nation of Cyprus.
In Cyprus as well as Stockton (plus San Bernardino, California and Jefferson County, Alabama), the question is: Who will be left holding the bag? A common theme is “haircuts,” or possible losses for investors (bank depositors in Cyprus; bondholders in California) to spare wider pain to taxpayers, pensioners, public employees, and other local stakeholders.
One problem with haircuts is that they can impair future market access: the government in question may have to pay higher borrowing costs to regain investor confidence. A wider concern is contagion: If investors fear they won’t get their money back, they might demand higher interest rates from the sector as a whole. Moody’s Investors Service publicly worried about such contagion last summer, in a report critical of U.S. municipalities and what the organization viewed as changing norms toward bankruptcy.
But there are a few reasons to be skeptical about the contagion scenario applied to munis. First, although broad (worth about $3.7 trillion in 2012), the municipal bond market is not very deep. On the supply side, a few large issuers like California, New York, and Texas dominate. On the demand side, most investors are households or institutions representing households such as money market mutual funds.
Because of its traditional mom-and-pop structure, muni bonds don’t trade very often and the market is not transparent. When bonds do trade, different buyers may pay different prices for the same issue, and prices can rise faster than they fall (the “rockets and feathers” phenomenon). Economists have rightly criticized these features as inefficient. However, some market participants counter that proposed cures might be worse than the disease.
A silver lining of less-than-perfect information and higher transaction costs in muni markets may be that shocks are transmitted slowly through the system. More educated institutional investors are probably able to sort good apples from bad; other investors simply “buy and hold.” A recent IMF working paper confirms these predictions: after a bad credit event, investors apparently shift their money from places like California and the City of New York to safer issuers. Rather than suffering from Stockton’s misfortune, other states and municipalities will probably benefit, much like U.S. Treasuries after the 2008 financial crisis.
Interestingly, the IMF authors did detect some evidence of contagion, or bad news spreading, but in an unexpected direction from munis to U.S. Treasuries. One explanation is that investors looked at an Illinois or California and worried about prospects for a federal bailout, analogous to Cyprus and the rest of the Eurozone. Still, measured effects were small and took time to surface. The U.S. also has a long history of steadfastly refusing requests for local aid.
In any event, it will take some time to parse through yesterday’s Stockton ruling. Its most significant effects may be felt within California – where many municipalities pay into the state’s CalPERS pension fund. The judge ruled that CalPERS was just another creditor, but we still don’t know who will be left holding the bag.
With state finances gradually improving, some Republican governors are turning their attention to fundamental tax reform. Louisiana Governor Bobby Jindal has proposed replacing his state’s personal and corporate income taxes with higher sales taxes. Nebraska’s Dave Heineman and North Carolina’s Pat McCrory would do something similar, broadening the sales tax base and perhaps including some previously tax-exempt services.
With Washington apparently stuck in gear on taxes among other issues, it may be tempting to see the states as leading a way to reform. Unfortunately, some of the proposals currently circulating – and the idea of states as laboratories for a fundamental federal tax reform —are fundamentally flawed.
First, as my Tax Policy Center colleague Ben Harris has noted, income-sales tax swaps would be regressive – or hit low income household the hardest. This is because low income households must dedicate a greater share of their income to consumption to achieve a basic standard of living and more of their consumption tends to go toward goods (which are taxed) versus services (which are typically not). These households also often benefit from income tax rebates which presumably would be wiped out along with the tax.
Another key issue is whether states would go after currently untaxed services. Most states have already picked off easy targets like tuxedo rentals and tattoo parlors. As pointed out by the Tax Foundation’s Joe Henchman, it’s a much heavier lift politically to tax professional services of lawyers, accountants, and real estate agents. Just ask lawmakers in Maryland, Michigan, and Florida who enacted new sales taxes on some services but were forced to repeal the levies in the face of industry backlash.
It is unclear whether states without an income tax would be able to raise adequate revenue to provide the services that individuals and businesses value. Proponents of tax swaps often point to modestly higher growth in states without a personal income tax. But these comparisons are misleading. States without income taxes usually have strong alternative tax bases like energy (Texas, Alaska, and Wyoming) or gambling (Nevada).
More broadly, states are not the federal government. The usual argument for a federal consumption tax – that it would spur investment by reducing future tax penalties on savings – does not apply in an open economy where people may respond to higher sales taxes by doing more shopping online or in neighboring states. The federal government can afford to worry less about tax flight. It is simply much easier to cross state rather than national borders to avoid taxes unless you’re a professional athlete or, well, Gerard Depardieu. At both government levels, higher rates can also prompt flat out tax avoidance or cheating.
Proponents of sales-income tax swaps are correct in noting the income tax’s one major flaw: volatility. An overreliance on income taxes can put states on a revenue rollercoaster and make them very sensitive to economic downturns. This is a particular problem in states where income tax rates rise sharply with income or where individuals get more income from variable sources like stock options and capital gains.
However, states can address these problems by doing a better job managing their budgets. For example, they could improve their rainy day funds and park more money there when times are good. They might also reconsider rules that make it prohibitively costly to raid these funds in a bad economy.
In other words, switching from income to consumption taxes may sound like music to federal policymakers’ and some economists’ ears. But another equally resonant sentiment, especially among the latter group, is to upgrade fiscal infrastructure when the opportunity cost is low. Translation: fix the roof when it’s not raining.
On Monday, I attended my first meeting of the District of Columbia Tax Reform Commission. The independent commission was authorized by the Tax Revision Commission Reestablishment Act of 2011 and is chaired by former DC Mayor Anthony Williams. It includes ten other members appointed by Mayor Vincent Gray and Council Chairman Kwame Brown.
I was appointed to the commission by Mayor Gray and am honored and delighted by the appointment. As someone who has probably thought about taxes more in theory than practice, I am really looking forward to this opportunity to engage in crafting a better tax system – by which I mean one that is simpler, fairer, and more efficient as well as contributing to the district’s economic prosperity and quality of life.
If these goals sound familiar, they should. Presidential candidates and members of Congress tout them whenever they talk about fundamental tax reform, which is often these days as the campaign heats up and the “fiscal cliff” looms.
But policymakers everywhere have struggled with tax reform, and with good reason. As TPC co-director Donald Marron pointed out yesterday, tax reform is hard.
Why? Because the characteristics of a good tax system are internally inconsistent. Think of London circa 1990, a very different place from site of today’s Olympics. As vividly captured in Joel Slemrod and Jon Bakija’s excellent Taxing Ourselves, on March 31, 1990, rioters set fire to luxury cars and smashed windows. Hundreds of police officers and demonstrators were injured, and hundreds of protestors were arrested.
The reason? A poll tax that would have fallen equally on all residents regardless of income or wealth, replacing a property tax that varied with home values. The poll tax was reviled and eventually repealed. But it had one advantage squarely in its column: it was efficient. As a per capita tax, it could not be avoided by sheltering income, working less, or buying stuff from the Internet. The only way to avoid it was by not being alive (or, less vividly, failing to register with your local elections official). In this case, the certainty in life was death OR taxes.
The problem was that efficiency conflicted with another goal: fairness. Many people think tax burdens should be progressive, or vary with ability to pay. However, this can contradict yet another goal: rewarding effort or economic competitiveness.
We have all these challenges and more in DC. There’s the District’s unique status as a state and local government, its special relationship to the federal government (which puts some revenue sources off limits), and its place in a regional economy that also includes heavy hitters like Maryland and Virginia. DC also struggles with providing services to a diverse population with high per capita income but also a high poverty rate.
Still, the last time anyone took a good look at DC’s revenue system was 1998. That’s the same year Google was founded. Mark McGuire was hitting the ball out of the park instead of Bryce Harper. The district was just emerging from insolvency and people and jobs were fleeing the city.
A lot has changed since then. Beyond the effects of a winning baseball team, the local economy rode out the recession better than other regions, thanks in part to a strong federal presence. Of course, that presence also leaves the district vulnerable to federal belt tightening and limits on local fiscal autonomy. So, it’s a good time to take a closer look at DC’s revenue system and see what we can do better.
For months, astute observers called Medicaid the “sleeper issue” of the Supreme Court’s Affordable Care Act deliberations. Last Thursday, they were proven correct. A majority of the Supreme Court struck down a provision of the law giving the Health and Human Services Secretary authority to pull all federal Medicaid funds from states refusing to extend eligibility to low-income, non-elderly adults.
The ruling was surprising for several reasons. First, starting with land grants for public colleges and universities and continuing through to the interstate highway system and social safety net, the federal government has a long history of conditioning state and local grants on acceptance of its rules. A prime example is federal funding for K-12 education under the No Child Left Behind program.
This is also how Medicaid has operated since its inception in 1965. At the time, Congress explicitly reserved to itself the “right to alter, amend, or repeal any provision.” Indeed, it has exercised this right several times, expanding eligibility to low income pregnant women and various groups of children in the 1980s and 1990s. Some expansions came with carrots (promises of extra money) and some with sticks (threats to existing funds).
But the majority held that this expansion was different, not just tinkering around the edges but fundamentally changing the program’s identity. What’s more, because Medicaid has grown so big (it was states’ single largest budget item in FY 2010, including federal funds) and so much a part of state law, giving the HHS Secretary discretion to yank federal funds amounted to an order, even an existential threat (a “gun to the head” or “your money or your life” proposition).
But the same could be said of the federal tax code, which provides states with various expensive goodies (deductibility of state and local taxes, exemption of muni bond interest from federal income taxes) and whose very existence is a huge subsidy (because states can piggy back off of federal definitions and administration). Numerous budget commissions and task forces have put these subsidies on the chopping block, and at a recent hearing Senator Max Baucus suggested he might do the same. Are these changes now also off the table?
Moreover, in both cases, this symbiosis between states and the federal government developed over time because states said “yes” to federal support. With Medicaid, this relationship was severely tested in the Great Recession, when states had to plug massive budget holes but could not cut Medicaid eligibility because of federal program requirements. Several state Medicaid finance directors openly discussed rejecting federal funds to get out from under these requirements.
However, quitting Medicaid was never a real possibility. States needed the money to take care of individuals who would otherwise go untreated and care that would go uncompensated.
Now, as then, states will take the federal money, especially in light of longer term fiscal strains like rising health care and retirement costs. This won’t be easy. As with any federal grant program, subsidies set out in the Affordable Care Act (100 percent, declining to 90 percent in 2020 and thereafter) are not guaranteed over time.
Another source of uncertainty is what the newly eligible population, and others who come out of the wood work, will look like. Evidence from Arizona suggests some low cost young adults and some higher cost near-elderly with chronic health needs.
Some governors and lawmakers have already said their states will decline to participate in the Medicaid expansion. But eight states have already gotten started on extending eligibility through waivers programs and another three are in the queue. Notwithstanding the highest court in the land, the whole Medicaid package is still an offer states can’t refuse.
Summer is here and that can mean only one thing – the start of movie season. Well, that and California’s annual budget mess. Like a tired franchise that keeps coming back, it’s the same story year after year, sometimes gussied up with computer generated effects or a surprise cameo appearance.
On Saturday, Governor Jerry Brown kicked things off by announcing that tax collections were coming in below projections, and so the state would face a $4 billion deficit by the end of the current fiscal year (June 30th) if lawmakers failed to take corrective action. Left unchecked, by the end of next fiscal year, the deficit would grow to $16 billion.
If this all sounds familiar, it’s because in every budget cycle since the last recession, the state has started with a projected gap between inflows and outflows. The problem has certainly grown worse lately, as California and nearly all states, have struggled mightily with falling revenues and rising service demands in the Great Recession. But it’s inescapable that lawmakers could have fixed the roof when it wasn’t raining. They didn’t.
This is what’s known in the business as a “structural deficit.” It means that there is an ongoing mismatch between revenues and public spending, regardless of how the economy is performing. Some would attribute this mismatch to a disconnect between what voters want from government and what they are willing to pay for it. Others would call it a failure in government’s ability to provide services efficiently and live within its means.
The problem is that the debate about right sizing government – in California and Washington, DC – typically happens in a fact free zone. No one is talking about the business of government, what it provides, to whom, and at what cost. The truth is we have very little data to underlie this kind of conversation. Budgets are rife with information, and California’s non-partisan Legislative Analyst’s Office does a Herculean job putting out its own materials. What’s missing someone to put it all together. Some nonprofits and advocacy groups are providing a good start.
Also, voters and politicians alike could be more engaged. Instead, California’s budget season usually follows the same plot line: January budget release, May revision, and then a summer of gridlock punctuated by a few high profile protests and maybe a cash crisis necessitating state IOUs. All is resolved in late summer or early fall (well beyond the state’s June 15th constitutional deadline and into the July 1st fiscal year). Or is it? The villain always comes back, and the process begins again.
Maybe this year will be different. The governor is proposing some harsh cuts to health and social services on top of those that have already happened since 2009 as well as converting state employees to a four-day work week (at 5 percent less pay). If voters do not approve his November ballot initiative for a temporary income tax surcharge on high-income residents and a quarter cent sales tax boost, public schools, colleges, and universities are next on the chopping block. Those kinds of cuts, as well as closing 70 state parks, may get people’s attention.
Or, as one LA observer noted, “…we are about to head into the summer, when people are not spending a lot of time paying attention to what is happening in government.” Alas.
Originally posted at the Brookings Institution Up Front Blog on May 17, 2012.
It was “states coming to Congress as mendicants, seeking relief from the consequences of their choices.” No, although the Dickensian imagery may fit with the holiday decorations, that didn’t happen either. To the contrary, governors spent much of the year fretting about federal inaction on the budget and debt limit.
What did happen is that state revenues rebounded. After falling further and faster than in any recession since the Great Depression, taxes started coming back in early 2010. They continued growing through the third quarter of 2011.
However, tax revenues still haven’t regained peak 2008 levels. The latest data also suggest growth may be moderating, and some states are reporting monthly collections below projections.
2011 was also the year that local property taxes finally dropped. The resilience of property tax revenues until now may seem puzzling given 30 plus percent housing price declines. The explanation is that it typically takes 2 to 3 years for lower prices to show up as lower assessed values and property tax bills.
In the meantime, some local governments have been able to raise property tax rates to compensate for depressed home values. Others benefited from lags in adjustment from home prices to tax revenues, just as homeowners benefitted from these delays in boom years.
The other big story of 2011 is state and local government job cuts. Although the private sector added jobs in 2011, state and local governments have been shedding them since 2008. Overall, state and local governments have cut 640,000 jobs (3.2 percent of payroll) since August 2008 and they show no signs of hiring again anytime soon.
What’s next for 2012? Making New Year’s predictions is a mug’s game, but there are a few trends worth watching.
First, chickens will come home to roost. It’s hard to imagine voters will fail to notice cumulative effects of real cuts to state and local government spending per capita in 2009 and 2010. Tracking government outputs and service quality is always tricky. However, news reports suggest longer waitlists, uninvestigated crime reports, shorter school years, etc. If the economy does not pick up steam and voters continue to resist tax increases, we can expect more of the same in 2012.
Of course, there may have been room for efficiency improvements before the recession. But state and local governments specialize in exactly the kinds of labor-intensive services (education, health care, public safety) that are notoriously resistant to productivity gains. What’s more, voters tend to reward politicians for more – not fewer – teachers in the classroom, cops on the street, and so forth.
Next, there will be more cracks in the edifice of federal-state-local government cooperation. Governors may not have come begging to Washington in 2011, but they did implore Congress’ super committee to leave states alone as it sought to stabilize the federal debt. Now, although the committee’s failure triggered automatic spending cuts starting in 2013, these cuts will exempt Medicaid and other big ticket items. Still, communities that depend on federal wages, contracts, or grants will be affected.
Finally, state and local governments will continue attempting to tackle their long run fiscal challenges – pensions and retiree health costs – which happen to look a lot like the federal government’s own challenges. New government accounting standards to be released in June 2012 may accelerate this trend. Given the furor over public pensions and labor compensation more generally in 2011, this could be another year of conflict in state capitols and city halls.
In other words, fasten your seatbelts, it’s going to be a bumpy 2012.
Originally posted at the Brookings Institution Up Front Blog.
Michael Lewis is a brilliant writer who has brought clarity and insight to the sometimes arcane worlds of Wall Street, baseball, and parenting. In his latest book, he surveys fallout from the 2008 financial crisis in exotic locales such as Greece, Iceland, and California. Uh oh.
Dedicated readers of this blog know that I have something of a soft spot for my home state and for local governments in general. So it was tough sledding for me to get past the opening paragraphs of an excerpt from Lewis’ book in Vanity Fair. There are some errors of fact and omission, including this one:
“[In December 2010] U.S. state and local governments faced a collective annual deficit of roughly half a trillion dollars”
No. In December 2010, as budget officers prepared their fiscal year 2012 budgets, states faced a collective shortfall of $100 billion. In the three fiscal years since the start of the recession, they had taken actions to close an estimated $430 billion worth of gaps. That makes a cumulative shortfall of more than $500 billion after the worst revenue plunge since the Great Depression. It is misleading to characterize this as an annual and potentially recurring gap.
Lewis goes on to defend Meredith Whitney’s now infamous prediction of “50 to 100 sizable [municipal] defaults, [maybe] more” amounting to “hundreds of billions of dollars.” He argues that she did not specify a time horizon (always key to a good forecast) so shouldn’t be judged because defaults are coming in at only about $1 billion this year, a quarter below last year, and as usual they are concentrated among health care and housing entities not cities and counties.
Lewis also suggests Whitney was referring to local government finances more generally in the statement: “it’ll be something to worry about in the next 12 months.”
Okay, I’ll buy that. Indeed, a recent survey from the National League of Cities confirms that city finance officers are feeling squeezed as state aid evaporates and property taxes start to drop. They are making tough choices, including raising fees, cutting services, and delaying capital projects. Meredith Whitney calls these “defaults on social contracts.” Others might call it governing.
In any event, Lewis’ piece may be one of those cases where facts get in the way of a larger story. He rightly points out that the country is built on regional economies, some which are thriving and others which are not. He’s also right that states have the ability to “push their problems down to counties and cities… where American life [is] lived.”
Perhaps most importantly, he conveys that budgeting is all about tradeoffs – prison guards versus professors, library hours versus cops, etc. Lewis recognizes that there are heroes in local government, like Vallejo fire chief Paige Meyer who is unafraid not only to run into a burning building but also to “[sit down and make] a list of ways to improve the department…. measure things that hadn’t been measured… [and] rethink firefighting.” I just wish he had interviewed more of them than the doomsayers.
Much has been written about how a failure to reach agreement on the federal debt limit would affect the economy and global financial markets. Lately, attention has turned to state and local governments. Moody’s warns that a federal credit downgrade would immediately lower ratings for 7,000 state and local issuances and possibly affect even some gold plated AAA states. At the same time, backers of a federal balanced budget amendment point to states as an example where such rules have worked.
What’s going on? Will a federal default doom state and local governments? Are states the new model of fiscal probity?
First, it’s important to remember that although state tax receipts are picking up, states and localities are still climbing out of a revenue hole created by the Great Recession. Meanwhile, federal stimulus funds have largely run out along with easy fixes like selling off assets, raiding special funds, and deferring obligations. Against this backdrop, any federal action that cuts off revenue or increases costs is not helpful.
Next, state and local governments are already feeling the brunt of “extraordinary measures” undertaken when the federal government hit its debt limit in May. Back then, the U.S. government stopped issuing State and Local Government Securities. Affectionately known as SLUGs, these securities allow state and local governments (much like mortgage holders) to refinance their debt without violating federal rules against arbitrage, or profiting from their tax-exempt bond authority.
This is a headache, although hardly the end of the world. State and local borrowers can still refinance, but they have to do it by assembling the right bundle of regular U.S. Treasuries, usually with the help of a paid financial advisor.
Now, if U.S. Treasuries were downgraded, all state and local debt refinanced in this manner would fall with it. To be sure, these bonds represent only $130 billion out of a $2.95 trillion market. However, this is small consolation for the pension funds, insurance companies, and other entities who purchased this debt once hailed as “just as safe” as U.S. Treasuries.
Of course, none of this will seem very important if we are in a double dip recession or global credit crunch. As Moody’s notes, particularly at risk would be states dependent on federal contracts or salaries paid to federal workers as well as those with more variable rate debt. But all states and cities are concerned about what will happen if tuition aid, Medicaid payments, and community development funds dry up when the federal spigot turns off.
In truth, no one knows what will happen after August 2nd. It’s not clear whether and how the federal government would “prioritize payments,” and if so where states and localities would stack up against other claimants.
Originally posted at the Brookings Institution Up Front blog as part of an “Around the Halls” discussion on the debt limit.
When Californians voted last fall to send Jerry Brown back to Sacramento, many commentators gleefully revived the Governor Moonbeam moniker. Now that he has submitted his first state budget, the governor is looking a lot more like a Tiger Mom. In particular, he is directing some tough love toward local governments.
Brown has proposed $12.5 billion in spending cuts to help close the state’s projected $25+ billion gap. He’d reduce Medicaid benefits and provider payments while raising co-pays (saving $1.7 billion). He’d impose stricter time limits for welfare while slashing cash grants and childcare services ($1.5 billion). His plan would cut university budgets ($1 billion) while sticking state workers not covered by collective bargaining agreements with a 10 percent pay cut ($400 million). And, by the way, the governor wants 48,000 cell phones back.
Perhaps most audaciously, the governor is proposing a major reorganization of the state-local fiscal relationship. Although this shift would be accompanied by revenues and therefore is not expected to reap big short-term gains, it would move some fast-growing health and public safety programs off the state’s books—and onto local budgets.
In the near term, Brown also wants to grab $1.7 billion from local governments by shutting down their redevelopment agencies. Little understood even within California where they originated, these agencies rely on a mechanism known as tax increment financing to build large projects.
Here’s how it works: A city manager or county administrative officer declares an area blighted and creates a redevelopment agency (usually the council or board of supervisors wearing a different set of hats). The agency is entitled to any increase in property taxes that occurs within its boundaries over 50 years, and sometimes longer. It can also issue bonds secured by these future revenues.
The catch is that the money has to come from somewhere. In California, the state is on the hook for property taxes that would have otherwise gone to schools. Other local governments lose out on property taxes that they would have received.
But the real problem is determining how much growth would have occurred anyway, without a designated redevelopment area. In most places, it’s hard to believe the answer is zero, but that’s what tax increment financing implies.
Another problem: Once redevelopment areas are born, they rarely die. For example, Los Angeles officials created the Hoover Redevelopment Project in 1966 to improve the area surrounding the city’s Memorial Coliseum. In 2004, 35 years before the project was due to end in 2039, state lawmakers extended it to 2051. Their reasoning: an NFL franchise might move to the area someday and funds would be needed for improvements. As a Senate staff analysis noted at the time:
Legislators know that the rehabilitation of blighted neighborhoods takes time and demands policymakers’ patience. But the Committee may wish to consider why it should [take] Los Angeles officials a century to redevelop the Hoover neighborhood.
To be fair, California requires redevelopment agencies to pass some funds through to other local entities. They also must set aside 20 percent of revenues for low and moderate income housing.
Still, it’s hard to see California redevelopment agencies as anything but a beggar-thy-neighbor response to Proposition 13 and other limits on local revenue raising authority. They are part of a larger dysfunctional system. Viewed through this lens, the governor’s proposal, along with a lower vote threshold for local infrastructure bonds and an openness to realigning responsibilities and revenues, is a step in the right direction.
It’s never really fun to say “I told you so.” Well, it’s a little fun. The Germans even invented a word for this – Schadenfreude – which loosely translates as “sour grapes.”
Maybe it’s sour grapes that has the rest of the country repeatedly turning to California’s budget mess. Or maybe California is just always in a budget mess. Indeed, the state has faced operating shortfalls – or gaps between inflows and outflows – in every year since 2002.
But this year, it would seem that state lawmakers and outgoing Governor Arnold Schwarzenegger have really outdone themselves. They busted through last year’s tardiness record by enacting a budget 100 days into the new fiscal year. Like last year, they balanced the books – but with a combination of spit and polish and pixie dust.
In particular, they assumed that the feds would pony up $5.3 billion, although only $1.3 billion has been promised so far (as an internal presentation said: “Still more work to do in Washington”). They hoped for a speedier economic recovery ($1.4 billion). They borrowed from internal funds ($2.7 billion) and deferred payments to schools and community colleges ($1.7 billion). They also suspended a Net Operating Loss tax deduction ($1.2 billion) and planned to sell and lease back 11 state properties ($0.9 billion) – actions which simply put off today’s problems until tomorrow.
To be sure, states often substitute happy thoughts for hard choices. And all states – not just California – are still reeling from the recession, when they suffered their worst revenue declines on record as caseloads mounted for Medicaid and other public assistance programs. Although the latest data show a slight uptick, state and local revenues remain essentially flat. Meanwhile, state and local governments are slashing payrolls to make ends meet.
California’s budget also makes some real cuts – including $1.6 billion from pay and benefits. And it increases employee contributions toward retirement for all new hires and ends the practice of “spiking,” or boosting final salaries to raise pensions. These reforms may pave the way for other states, which together confront unfunded promises of more than $1 trillion.
Finally, in his last California budget deal, the Governor insisted on a constitutional amendment increasing the maximum size of the rainy day fund and requiring deposits of above average revenues. Of course, this measure would have to go on the ballot – and voters rejected a similar proposal just last year. Some would call this sunny, California optimism while others would say it’s Peter Pan naivete.
Unfortunately, it’s no fun to be right when it comes to calling bad news, but sometimes you’ve got to at least start fixing the roof when it’s still raining. Wishing for the sun to come out is just not enough.