By Bob Williams
Last month, the Government Accountability Office released its annual report on the fiscal condition of our states. The report’s title — “State Fiscal Gap Seen Worsening” — says it all. Every state is facing record deficits, and the GAO predicts the budget gaps for state and local governments will steadily worsen through 2060 absent any policy changes.
The GAO calculated that closing the fiscal gap with an immediate action would require an annual 12.7 percent reduction in state and local government expenditures, or tax increases of a similar magnitude.
The downward spiral that state budgets are experiencing are the result of accounting gimmicks, reckless spending, and a failure of state legislatures and governors over the years to make the tough decisions to reset state spending to a level that taxpayers can afford.
In October, we at State Budget Solutions released a report that showed total state debt exceeds $4 trillion. The states with the largest total deficits are California, New York, Texas, New Jersey and Illinois, respectively. California hit the bottom of the list, with a deficit of more than $612 billion. Even the states with the lowest deficits are still in the red by $5 billion to $10 billion.
So what can each state do to fix this? The answer can be found in pension reforms and a change in budgeting strategy.
First, legislatures and governors must do a strategic analysis and identify core functions of their government. This will help them begin implementation of Reality-Based Budgeting, also known as outcome performance-based budgeting. This budgeting strategy forces all legislators to start by asking, “What must the state accomplish?” and to set clear measurements for programs’ efficacy and efficiency. Upon determining how much money the state actually has, government officials must establish what is the most effective and efficient way to deliver essential services within those limits.
Reality-Based Budgeting eliminates budget gimmicks and accounting games. It provides state legislatures the opportunity to examine how much funding is truly needed for each government service or program. It eradicates redundancies while allowing transparency to shine through government spending.
Next, governments must tackle fundamental pension reform. Despite recent reform efforts, public defined-benefit pension plans are ultimately doomed unless we pump trillions more dollars into them. And even then, pensions are still endangered by reckless, shortsighted policies of politicians and fund managers.
Unfunded pension liabilities are the dark cloud on the horizon of state budgets; a cloud totaling trillions of dollars. Though they represent unavoidable fiscal debt, pension liabilities often slip under the radar when states tally up their spending, thanks to their status as “future payments” and the accounting games that states use to mask the pension problem.
States need aggressive pension reforms, including a move from defined-benefit plans to defined-contribution plans, which are similar to the 401(k) plans offered in the private sector. Defined-benefit plans guarantee specific levels of service regardless of cost, whereas defined contribution plans establish a fixed payment toward services. Instituting defined-contribution plans would end the endless cost escalations of nonsalary compensation. A move to defined-contribution plans would reduce the risk to taxpayers, provide lawmakers with a reliable cost estimate for budgeting, and give state workers control over their retirement funding. Example: Utah’s transition to a hybrid defined-contribution plan was a reform that cut the state’s $6.5 billion pension debt in half.
Now is the time for state governments to work together and create reform that will ease their deficit. Delay and avoidance only make deficits worse. There is no spell to cast to make the effects of decades of mismanagement magically disappear. The day of reckoning is here.
(Bob Williams, President of State Budget Solutions, is a former Washington state legislator, gubernatorial candidate and auditor with the Government Accountability Office. Williams is Founder and Senior Fellow at the Freedom Foundation, a public policy organization in Olympia, Washington.)
