My ex-husband Richard Ravitch is a brilliant man who has spent most of his life in public service. He was born during the Great Depression, and he grew up idolizing Franklin Delano Roosevelt and believing that the highest ideal was to improve the well-being of the public.
We have an informal agreement that he doesn’t do education and I don’t do housing, transportation or public finance. But now he has stepped into my territory and I must step into his.
Yesterday he and Paul Volcker released a task force report on the budget crisis facing states. The task force report should be read by everyone because it contains an urgent warning. As of 2009, states now spend more on Medicaid than on K-12 education. That is a historic reversal. States are facing unsustainable costs and will have to make cuts to essential services if they can’t make appropriate adjustments to their tax and spend policies. Added to this, the possibility of federal budget cuts will do terrible damage to education and other basic services.
The task force report does not tell states precisely what to do beyond warning them of the cliff towards which they are heading. It says to stop the gimmicks and the one-shot funding measures. It says to face the problems head-on.
The task force report does not call for cuts to education. I spoke to Richard, who is a close friend, and he said that the point of the task force report was to warn states to take action now so that they can protect education and other essential state functions into the future.
My view: If we continue to cut K-12 education, preschool education, and postsecondary education, as so many states now are doing, we sacrifice our future. We throw away our seed-corn. If we continue to shift the costs of higher education to students, we will narrow access to higher education, which develops our nation’s innovativeness, research, and brainpower. We cannot eliminate access to education and erode its quality and then expect our nation to have an educated society, an innovative society, or a good society. My friend Richard Ravitch agrees.
Here are the recommendations of the task force:
Conclusions and Recommendations
The recent recession and financial crisis have exposed both structural problems in state budgets and the increasingly pro-cyclical nature of these budgets. States and their localities face major challenges due to the aging of the population, rising health care costs, unfunded promises, increasingly volatile and eroding revenues, and impending federal budget cuts.
If these problems are not addressed soon, they are likely to worsen. The problems affect the national interest and require the attention of national policymakers. In addition, each state can sharpen its fiscal tools to improve its own decision-making process.
■■ The public needs transparent, accountable state government finances. States and standards- setting and advisory bodies should develop and adopt best practices to improve the quality of planning, budgeting, and reporting.
–– States–should–replace–cash-–based–budgeting, with modified accrual budgets so the public and legislators can easily discern how revenues earned in the fiscal year relate to obligations incurred in the same year. This change won’t eliminate budget gimmickry but will be a step in the right direction, particularly if accounting standards continue to be strengthened. In addition, states should publish information, together with their budgets, on the extent to which these budgets
rely on temporary resources and underfund annual required contributions for pension and retiree health plans.
–– States–should–enact–multi-year–forecasts–and–plans–that–extend–at–least–four–years–beyond– the–current–budget–year, in order to increase their ability to make better short-term decisions and improve long-term outcomes. States should encourage independent review of their budget forecasts. Above all, states need rules that encourage them to adhere to these plans, so that the longer-term consequences of budgetary decisions become apparent.
– State Comprehensive Annual Financial Reports should be supplemented with easily accessible summaries of financial information and should be issued more quickly after the end of the fiscal year, so that they are available before the next year’s budget is proposed; the private sector accomplishes this task regularly.
■■ States should strengthen and make better use of their main tool for counter-cyclical policy, their rainy day funds. They need to save larger amounts automatically. Also, to avoid discouraging the use of these funds, states should allow enough time to replenish them once a fiscal emergency is over. Successful state models of rainy day funds, like those in Virginia and Texas, should be
Report of the State Budget Crisis Task Force SUMMARY
promoted, disseminated, and replicated. It is in the national interest that states have effective rainy day funds so that state balanced-budget imperatives do not counteract efforts to spur national economic recovery and so that states can maintain more-stable tax and spending policies, particularly for the programs implemented by states under federal oversight.
- ■■ Pension systems and states need to account clearly for the risks they assume and more fully disclose the potential shortfalls they face. States and retirement systems should develop and adopt rules for responsible management of these systems and mechanisms to ensure that required contributions are paid. States should begin to use dedicated systems of reserves to save for the ongoing health benefits they expect to provide to retirees and should monitor the ability of their local jurisdictions to do the same.
- ■■ State tax bases have eroded and become more volatile; these developments are undermining fiscal sustainability. States should mitigate these trends by seeking reforms that would make their tax structures more broad-based, stable and productive. The federal government should exercise its authority to make it easier for states to collect existing sales taxes on goods and services sold over the internet. Federal tax reform needs to take account of the significant effects of such change on state and local tax systems.
- ■■ Federal deficit reduction and budget balancing actions pose serious potential threats to
state and local government economies and budgets. There is a “disconnect” between the federal government and the states, with no formal mechanism for evaluating the impact of proposed federal policies on the states. There should be a permanent national-level body to consider the ways in which federal deficit reduction or major changes in the federal tax system will affect states and localities. Such a body, with purposes similar to those of the former Advisory Commission on Intergovernmental Relations, should conduct careful, ongoing examination of the relationship between federal and state governments. Even before such a body is established, Congress should require the Congressional Budget Office to prepare analyses of the ways in which major legislative proposals, whether relating to mandated programs, discretionary programs, or tax revenue, are likely to affect the fiscal situation of state and local governments.
- ■■ Federal and state governments should work together to control health care costs and Medicaid costs. State costs for existing Medicaid programs are likely to continue to grow faster than state revenues; many states already consider these costs unaffordable unless they scale back other essential functions or substantially raise taxes. Now that the Supreme Court has validated most of the Affordable Care Act, states that implement eligibility expansions will incur additional annual costs over the next eight years that could range from zero to five percent of baseline Medicaid spending.
Report of the State Budget Crisis Task Force
- ■■ Few state governments have effective procedures for monitoring the fiscal condition of
their local governments in a timely manner or taking early action to help local governments resolve their fiscal problems before they threaten insolvency or bankruptcy. Most states either ignore such problems altogether or wait until local governments actively seek state help because they are on the brink of insolvency. Fortunately, a few states have well-established monitoring and early intervention procedures that can serve as models for other states. North Carolina, New Jersey, Kentucky, Pennsylvania and Michigan are examples worth careful study.
- ■■ Essential state and local infrastructure is starved of funding and necessary maintenance. This underfunding threatens the nation’s competitiveness; the longer it is ignored, the larger the problem it will pose. An essential first step toward mitigating the problem will be the adoption and funding by states of realistic annual capital budgets based on multi-year capital plans.