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State Fiscal Conditions 

State and Local Governments Face Severe Long-Term Fiscal Challenges

States have been grappling with their most serious fiscal crises since the Great Depression. Even before the 2008 financial collapse, many states faced long-term structural problems, and now they face additional threats. Our federal system gives state governments responsibility for providing most domestic governmental functions such as public education, health and welfare services, public safety and corrections and essential infrastructure for transportation, water supply, sanitation and environment. States oversee the elementary and secondary school systems that educate the nation’s future voters, jurors, and workforce and, together with localities, pay more than 90 percent of the cost of this education. State and local public colleges and universities educate more than 70 percent of the students enrolled in this country’s degree-granting institutions. States spend more than $200 billion annually for health care for the poor and medically needy. States and their localities finance nearly three-quarters of all public infrastructure — schools, highways and transit systems, drinking water, and other projects crucial to economic growth and public health and safety. They employ 19 million workers - 15 percent of the nation’s workforce and six times as many workers as the federal government employs. In total, state and local governments combined spent $2.5 trillion in 2009, which is more than the federal government spent on direct implementation of domestic policy.

To understand the threats to fiscal sustainability, a task force created by Richard Ravitch, Lieutenant Governor of New York State and Paul Volcker, former Chair of the Federal Reserve System and directed by Professor Donald Boyd of the Nelson A. Rockefeller Institute of Government at the University of Albany and, examined six states: California, Illinois, New Jersey, New York, Texas, and Virginia, in depth. While all states are different, these states reflect important geographical and political differences within our country. They account for more than a third of the nation’s population and almost 40 cents of every dollar spent by state and local governments. All six states face major threats to their ability to provide basic services to the public, invest for the future, and care for the needy at a cost taxpayers will support. While the study states differ along many dimensions, including politics, policies, economies, and demographics, they share many problems, including these six major fiscal threats:

  • Medicaid Spending Growth Is Crowding Out Other Needs
  • Federal Deficit Reduction Threatens State Economies and Budgets
  • Underfunded Retirement Promises Create Risks for Future Budgets
  • Narrow, Eroding Tax Bases and Volatile Tax Revenues Undermine State Finances
  • Local Government Fiscal Stress Poses Challenges for States
  • State Budget Laws and Practices Hinder Fiscal Stability and Mask Imbalances

These threats to fiscal sustainability create risks to essential state functions such as investments in education and infrastructure, and they affect the ways in which states are likely to issue debt. Addressing these threats will not be easy. States must address these threats through the budget process, which reflects each state’s own culture, institutions, and politics. The effort to achieve an annual or biennial balanced budget is a major political and governing event in the states, made by elected officials in an environment that breeds caution, encourages short-term budget-balancing contrivances, and discourages investment for the future.

The Task Force examined each of these threats and risks after an introductory section on the ways in which the 2008 financial collapse impacted state finances and exposed pre-existing structural budget problems. The report provides reviews of the politics of budgeting and of the structure of the federal-state-local fiscal system. You can see the full report at: www.statebudgetcrisis.org.

 
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