A quick read of the headlines might lead one to think that state governments are headed the way of Lehman Brothers. However, a closer look at the tough decisions being made in state capitals across the country shows that governors and state legislators are confronting a historic state budget crisis head on. States know that there will be no more bailouts and are making the hard choices today on spending and taxes that Washington tends to ignore.
Speculation has swirled recently over the need to create an avenue for states to declare bankruptcy to address overextended pension funds and unsustainable labor contracts. While it is certainly true that many states have greatly under-funded their pension obligations and other compensation costs, a wave of recent actions shows they are capable of making the tough decisions necessary to confront these structural imbalances.
In California and Illinois, arguably the states with the worst structural deficits, Governor Brown has proposed a 10% salary reduction for state employees while Governor Quinn worked with the legislature to push through a 67% tax increase. Elsewhere states are braving court challenges to forestall cost of living increases for current retirees and scaling back benefits for new hires. Ideas for cutting costs only recently embraced in DC, such as freezing government pay, have been par for the course in state capitals for the better part of three years.
States are certainly guilty of poor decisions. Far too many have pegged their pension forecasts on the rosy returns of the tech boom and many have delayed pension payments and used other gimmicks to address short-term budget shortfalls. However, unlike municipalities, states are sovereign governments who hold their financial destiny in their hands. While Washington complicates this challenge through unfunded mandates and other conditions, ultimately it is within the power of the states to cut spending or raise revenue to meet their obligations.
Many states, such as Virginia, have managed their debt burdens prudently and are taking advantage of historically low bond yields to make wise investments in job creating infrastructure. Federal legislation opening the door for state bankruptcy could chill the bond market and drive up costs for all states regardless of their pension obligations or budget travails.
Instead of talking about bankruptcy, what states need is a national conversation on how both the federal government and the states can forge innovative solutions to address the mounting health care costs that lie at the heart of the long-term fiscal crisis both in DC and in the state house. Fortunately, the current crisis has shown that states are more than capable of finding innovative solutions to tough challenges.
In Indiana, Governor Mitch Daniels has worked with experts from The Council of State Governments' Justice Center to replace $1.2 billion in proposed spending for new state prisons with a $28 million plan to reduce recidivism through drug treatment based on a successful strategy used in Texas. In North Dakota, state leaders recently passed a law allowing advanced practice nurses to act as primary health care providers in the state Medicaid system to both lower costs and provide better access to care.
These are but a few examples of how states are rising to the challenge of addressing a historic budget crisis. While it is tempting for Washington to lecture, it would be far better for our national leaders to work with states to address our mutual budget challenges. Recent efforts both by the new Congress and the administration to look to state capitals for costs cutting ideas offer encouragement. Let's hope this dialogue, not bankruptcy, becomes the focus of the state-federal debate in 2011.
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