State Employees

As I noted over a year ago, the coming state budget deficits were going to bring both spending cuts and new taxes.  Budget battles are inherently bloody.  As state budgets are being reviewed, the spotlight is being shone on the pay, health care and pension benefits of government employees in some states. 

Here is an article highlighting some of the costs in several cash strapped states.  Some government employees will have to accustom themselves to pay and benefits that are more like the average wages and benefits of the taxpayers.

Oil Calvary To the Rescue

Many states are struggling with large budget deficits.  It surprised me to learn that the oil industry pays for almost 90% of Alaska’s state general fund.  By state law, the state sets aside 25 – 50% of certain oil and mineral tax revenues into a reserve fund.  Over the past twenty years the state has borrowed almost $4B from the reserve fund to balance their budget, repaying the loan during the past three years as oil prices increased. The state’s 2009 Fall Forecast shows a balance of over $8B remaining in the reserve fund.

Further south, California is struggling with a $6B budget shortfall for this year and over $14B for 2010- 2011.  Because the state relies so heavily on income taxes, a downturn in incomes, especially capital gains, has a severe impact on the state’s budget.  Like many states, California closed their budget imbalance with Federal stimulus funds.  California has been the largest recipient of these funds, totalling almost $7B by the end of 2009, with an additional $15 billion in awards to be paid to the state.  New York and Texas are the runner-ups in the stimulus contest but their awards total a bit more than half of what California has marked up.

Barring any further stimulus packages, the federal spigot to the states is scheduled to shut off this year, leaving state legislatures already battered by difficult choices to make even more unpopular choices.  California’s only choice may be to mount an army headed by a cigar chomping Gov. Schwarzenegger, invade Alaska and take over their oil fields and tax revenue.

State Spending

The downturn in the economy has spawned budget battles in many states. California’s budget woes have been getting a lot of press but other states face crises.

In Minnesota, Republican Gov. Pawlenty and the Democratic legislature have been at odds over measures to balance the budget. Here is a blow by blow account of warring budget priorities and resolutions.

Per capita state spending varies far more than the differences in the cost of living. We might expect New York’s per capita spending to be more than that of Colorado since it is more expensive to live in New York. Bank Rate’s cost of living calculator shows a 31% cost of living difference between Denver and New York City. But, as this Tax Foundation table of 2007 state spending shows, New York spent 78% more per person than Colorado.

Is it the density of the population that contributes to the increase? Apparently not. Florida, near the top of the list of states with the most population, spent less than Colorado.

18 states spent less than $5000 per capita in 2007. 17 states spent between $5 – $6,000. The remaining 15 states, Minnesota among them, spent more than $6000 per person. Minneapolis is only 7% more expensive to live in than Denver, but Minnesota’s per capita spending is 40% more than Colorado. Must be all that extra snow removal and lake maintenance in Minnesota.

Transparency

In a 4/29/09 WSJ op-ed, two senior research fellows at George Mason U., Veronique de Rugy and Eileen Norcross, make a case for the Federal Government to adopt a policy of true transparency. This would involve “putting specific details of every government expenditure online”.

Several states already so this, enabling the public to become watchdogs. The authors cite the example of the Missouri Accountability Portal (MAP) which posts all state expenditures. When the National Taxpayer’s Union “discovered more than $2.4 million spent for questionable purposes over the past eight years”, the Republican governor Matt Blunt asked for an audit.

The authors note that the Federal effort at Transparency, Recovery.gov, “only requires states and cities to disclose project-level expenses,” leaving the details out. While the authors want the Federal web site to list detailed expenses, I think that that is more appropriately a state function.

Missouri’s web page (link above) only says that stimulus expenditures are “coming soon” and we can only hope that they will offer the same kind of openness in revealing the details of stimulus spending. A big huzzah for Guv Blunt and the folks at Missouri’s state offices. Let’s encourage our states to follow their example.

In a 50 state survey the non-partisan Institute for Truth in Accounting found that “the same accounting rules are not being used for budget calculations as for financial reporting. Second, Comprehensive Annual Financial Reports (CAFR) are not being issued in time for legislators or governors to review the results meaningfully before planning the next year’s budget.”

States with billion dollar budgets are using the same “cash basis” accounting method that a very small business uses. States disregard liabilities for payments in future years in crafting their current year budgets. “All [legislators] have to focus on is expected cash flow in the coming fiscal year, and they can ignore amounts that will be paid in future years.”

If you reside in California or Illinois, skip this next part. It’s ugly. “California’s budget calculations included no estimate of revenues. Only estimated expenses are noted.” “The Illinois budget .. shows an ever-expanding hole between what was budgeted and what actually transpired during that fiscal year.”

Yay for Vermont, which “is carrying a positive net operating balance, and its budget tracks its CAFR comparatively well. Informed with such information, Vermont taxpayers, legislators, and media have a truer depiction of the state’s financial condition.”

State Budget Shortfalls

The Center on Budget and Policy Priorities (CBPP) reports that 47 states will probably face budget shortfalls in 2009 and 2010. The article contains a listing of all the states and their projected shortfalls. California’s budget gap is projected at over $13B this year and going to $25B in 2010.

Included in the recently enacted “American Recovery and Reinvestment Act”, the Federal Government will provide $135 – $140B in aid which will close about 40% of the total gap in state budgets. Bloomberg.com calculates that almost $13T has been pledged by the federal government to the financial industry.

Moody’s, the credit ratings firm, has recently issued a negative outlook on the creditworthiness of every local government in the U.S.

The CBPP article notes that “the vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes.”