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Richard Ravitch

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State Budget Crisis Must Be Addressed, Before It's Too Late

Posted: 07/17/2012 11:09 am

While much has been said of our problems around the growing federal debt and deficit, very little light has been shed on the other half of what I call the perfect storm. And that is why the State Budget Crisis Task Force was established last year to better understand the extent of the fiscal problems faced by the states in the aftermath of the global financial crisis.

The 11-member Task Force that I co-chaired with former Federal Reserve Chairman Paul Volcker today unveiled the first-ever comprehensive report detailing states' fiscal sustainability and actions that can be taken to address them.

While the extent of the fiscal challenge varies significantly state to state, there can be no doubt that the magnitude of the problem is great and extends beyond the impact of the financial crisis and the lingering recession. The conclusion of the Task Force is unambiguous: The existing trajectory of state spending, taxation and administrative practices cannot be sustained. The basic problem is not cyclical, it is structural. The time to act is now.

Many of us have read about the bankruptcy issues facing cities such as Scranton, Stockton and Central Falls, but when we combine the totality of the problem and look at the ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens, we are a threatened nation.

Our states and local governments bear a heavy burden, given that the U.S. Constitution leaves to states the responsibility for most domestic governmental functions: States and their localities largely finance and build public infrastructure, educate our children, maintain public safety and serve as the social safety net. State and local governments spend $2.5 trillion annually and employ over 19 million workers -- 15 percent of the national total and six times as many workers as the federal government.

I am hopeful the substantial array of facts that our Task Force has assembled will motivate Washington, our states and localities to commit to breaking down the disconnect that seems to permeate more and more.

To summarize, certain large expenditures are growing at rates that exceed reasonable expectations for revenues, including Medicaid, pension funds and health care benefits. And, at the same time, the capacity to raise revenues is increasingly impaired because of declines in sales, gas and income taxes. In addition, there are the spillover effects of the federal budget crisis on state and local governments, and state actions will have spillover impact on local governments.

Going forward, business as usual will not work. The storm warnings are there. Only an informed public can demand that the political systems -- federal, state and local -- recognize these problems and take effective action. The costs, whether in service reductions or higher revenues -- will be large. Deferring action can only make the ultimate costs even greater.

The work of this task force, to date, has been to diagnose the problem. Now, with today's report, we move to the next phase of going out and talking directly with the American people to gauge their interests in solving the problem, once and for all. I encourage you to read our full report at www.statebudgetcrisis.org.

 
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