Study Finds States Struggling In Recovery

By Jamey Dunn, Illinois Issues
A new study this week on state budgets found that the recent recession exposed and exacerbated unsound practices occurring nationwide and left many states, including Illinois, struggling to find stability. The report released by the New York City-based State Budget Crisis Task Force focused particularly on California, Illinois, New Jersey, New York, Texas and Virginia.

According to the report, those states hold a third of the country’s population and account for almost 40 cents of every dollar spent by state and local governments. “The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened,” Richard Ravitch, the former lieutenant governor of New York, and Paul Volcker, the former chairman of the Federal Reserve, wrote. Both are chairmen of the State Budget Crisis Task Force. “ The basic problem is not cyclical. It is structural. The time to act is now.”

The report found that state budgets fared worse in the downturn than other areas of the economy and would likely take longer to bounce back. “The sharp deterioration in state finances as a result of the 2008 financial collapse and associated recession is well-known. State government tax revenues were hit much harder than the overall economy. Although real gross domestic product declined by 5.1 percent during the recession, the components of personal income typically taxed by state governments declined by 10 percent; and consumption of items typically subject to state sales taxes declined by 11 percent.”

However, the study said that not all state budget problems can be blamed on the recession. Growing health care and retirement costs, coupled with budget gimmickry, had set many states, including Illinois, up for a fall. “The rapid growth in Medicaid spending has pushed aside other types of state spending. Medicaid recently surpassed K-12 education as the largest area of state spending when all funds, including federal funds, are considered; Medicaid appears likely to continue to claim a growing share of state resources,” the report said. All six states in the study have made efforts to slash Medicaid liabilities. Illinois is not the only state that has pushed off Medicaid bills from one fiscal year into the next. Texas intentionally underfunded its Medicaid program and now must make up a $4.8 billion shortfall by September 2013.

All six states were guilty of using budget gimmicks or paying for ongoing costs with one-time-only revenues. California, New Jersey and New York joined Illinois in borrowing against tobacco settlement revenues, a budgeting trick called securitization. All six states have delayed payments to local governments, schools or vendors. All six have also used fund sweeps to balance their budgets. All the states but Texas have borrowed either to refinance other debt or cover annual costs, including pension payments.

You can read Jamey's full report at: http://illinoisissuesblog.blogspot.com/2012/07/study-finds-states-struggling-at.html