Report Paints Gloomy Picture of States’ Fiscal Outlook

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July 17, 2012; Source: New York Times

Mary Williams Walsh and Michael Cooper report on a study by the State Budget Crisis Task Force that examined the fiscal situation of six states: California, Illinois, New Jersey, New York, Texas and Virginia. It’s no surprise that these states are by and large fiscal nightmares due to “rising health care costs, underfunded pensions, ignored infrastructure needs, eroding revenues and expected federal budget cuts.” The states’ fiscal phantasms will persist, according to the report, even if the economy rebounds because of these structural problems abetted by the states’ past practices.

Even for states that might have some possibility of an upturn in revenues with the purported easing of the recession, the report “called into question how states will restore the services they have cut during the downturn, saying that the loss of jobs in prisons, hospitals, courts and agencies have been more severe than in any of the past nine recessions.” The report also took note of states’ response to the current recession and described it as “a willingness to ‘unbuild’ state government in a way that has not been done before.” That’s bad news for nonprofits that might have hoped that an upturn in state tax revenues would mean a restoration of at least some of the programs that were cut.

The report cites a variety of budget gimmicks that the states used in recent years that will now come home to roost, making fiscal recovery elusive. Examples included New York State’s diverting funds that were supposed to have been used for other purposes, New Jersey’s borrowing against its share of the tobacco settlement, Texas’s delaying $2 billion’s worth of payments by a month to shift the expense into a different fiscal year, and Illinois’s habit of failing to pay nonprofit and for-profit vendors for services and products already delivered.

We would add additional challenges to these strapped state budgets. For instance, California will have to deal with fiscally bankrupt cities such as Stockton and San Bernardino. New Jersey will have to grapple with a governor who is vocally opposed to expanding Medicaid coverage as part of the formula included in the Patient Protection and Affordable Care Act. So imagine what happens if the economy isn’t really on a sustained recovery, but rather is headed for a second recessionary trough. It’s not pretty.—Rick Cohen