TOPICS > Economy

States Plagued by Fiscal Problems, Pension Payments

July 17, 2012 at 12:00 AM EDT
Grim findings from a task force come amid further setbacks to the nation's economic health. Jeffrey Brown discusses eroding revenues, state budget cuts and steep pension obligations with former New York Lt. Gov. Richard Ravitch, the report's co-chair, and Susan Urahn of the Pew Center on the States.
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JEFFREY BROWN: The troubles with the U.S. economy and the possible fallout were on full display today. A task force report told of states facing ever-deeper budget holes.

But the chairman of the Federal Reserve withheld any promise of immediate help. Ben Bernanke came before the Senate Banking Committee acknowledging that the economy has suffered a series of setbacks: a slump in hiring and job growth, a slowdown in manufacturing activity and reduced spending by consumers.

But while citing the trends, the Fed chair wouldn’t commit on if or when the Central Bank might act again to boost growth.

BEN BERNANKE, Federal Reserve chairman: We’re looking very carefully at the economy, trying to judge whether or not the loss of momentum we have seen recently is enduring and whether or not the economy is likely to continue to make progress towards lower unemployment and more satisfactory labor market conditions. If those conditions — if that doesn’t occur, obviously, we have to consider additional steps.

JEFFREY BROWN: Senators from the two parties pushed Bernanke in opposing directions.

Tennessee Republican Bob Corker said the Fed should take no new steps, leaving it instead to Congress to fix what ails the economy.

SEN. BOB CORKER, R-Tenn.: I think further actions actually take the impetus off us to act responsibly. And I candidly wish we had a chairman of the Fed sometimes that would say, ‘Look, we’re not doing anything else. Quit looking to us.’

Are you tempted ever to say that to Congress? Would you not say that now?

BEN BERNANKE: I don’t think that’s my responsibility. I have been assigned to do — to focus on maximum employment and price stability, not to hold threats over Congress’ head. Congress is in charge here, not the Federal Reserve.

JEFFREY BROWN: In turn, Democrat Charles Schumer of New York argued nothing will get through Congress in this election year, so the Central Bank must act.

SEN. CHARLES SCHUMER, D-N.Y.: So, given the political realities, Mr. Chairman, particularly in this election year, I’m afraid the Fed is the only game in town. I would urge you now more than ever to take whatever actions are warranted by the economic conditions, regardless of the political pressure.

JEFFREY BROWN: Bernanke did urge lawmakers on both sides to reach a long-term deficit deal by January 1 to avoid automatic spending cuts and tax hikes. And party leaders insisted today they won’t let that happen.

SEN. MITCH MCCONNELL, R-Ky.: We’re not going to let anybody’s taxes go up at the end of the year.

SEN. HARRY REID, D-Nev.: The American people don’t deserve to watch this debate come down to the last minute.

JEFFREY BROWN: But the path to any compromise was far from clear. And with that in mind, a number of former political leaders from both parties joined by several business CEOs announced what they called a campaign to fix the debt.

The group included Erskine Bowles, former chief of staff to President Clinton.

ERSKINE BOWLES, National Commission on Fiscal Responsibility and Reform: If we do nothing and we barrel through this fiscal cliff at the end of the year, we’re going to have about $7 trillion hit this country right in the gut. And that is enough to put our country back into a recession. That, we cannot have.

JEFFREY BROWN: Also today, a separate group, the State Budget Crisis Task Force, issued yet another dire warning, this one concerning the precarious fiscal health of many states.

Richard Ravitch served as co-chair.

RICHARD RAVITCH, State Budget Crisis Task Force: Well, we are digging a very, very serious hole for ourselves. And the real victims of that are going to be the social services, the infrastructure. That’s what’s being cut already.

JEFFREY BROWN: The report looked at six of the most populous states, California, Texas, Illinois, Virginia, New Jersey, and New York. The problems they face include growing Medicaid spending and pension liabilities, at a time when state revenues and federal grants aren’t keeping pace.

And it’s to the last of these issues, the fiscal problems of the states, that we go into more detail on now.

Richard Ravitch joins us, a former lieutenant governor of New York. He co-chaired the task force issuing today’s report with former Fed Chairman Paul Volcker. Also with us is Susan Urahn, managing director of the Pew Center on the States.

Welcome to both of you.

Dick Ravitch, what jumps out of this report is a sense that the situation is much worse than thought, much worse than states are willing to admit, and much worse than anybody seems to have a grasp on what to do with it. Am I overstating the problems?

RICHARD RAVITCH: No, you’re not.

And it’s a function of I think three things. One, there are basic expenditures, like Medicaid and retirement expenditures, are just — which are growing at a faster rate than state and local revenues. Number two, states for a long, long time had been using gimmickry, borrowed funds, proceeds of asset sales, to balance their budgets. And they have never been called to account by that.

Wall Street has been willing to aid and abet that process. And out of perfectly valid and wonderful motives, people — we have made a lot of commitments, but we have been unwilling to provide the revenues to match the commitments that we have made as a society.

JEFFREY BROWN: Well, Susan Urahn, you pick up on the revenue side because one of the things in the report is that they’re not matching. But they’re also lower than they have been. There are a lot of things hitting the states.

SUSAN URAHN, Pew Center on the States: Well, it’s absolutely true.

I think revenues are down in part because of the fiscal crisis, but it’s not just a short-term problem. If you look at the revenue base that states are dealing with, the tax base, what they have is they have a 20th century tax system, but it’s overlaid on a 21st century economy.

So they’re not taxing. They’re taxing an ever-diminishing part of what the economy is producing. So that means they’re just gradually eroding in terms of revenue. And if you look out over the long term, it becomes a really serious problem.

JEFFREY BROWN: And politically untenable to try to do anything to raise taxes.

SUSAN URAHN: Well, certainly, and as you look at the impact of the recession, the primary way that states dealt with the fiscal stress was cuts.

JEFFREY BROWN: The — Well, what would you add on the revenue side of that?

RICHARD RAVITCH: No, I think Sue said it very, very well.

Sales taxes are not growing, because more and more transactions take place on the Internet. Gas taxes, which finance a lot of infrastructure expenditure, are not going up because the tax is based on gallonage and not on price. And people drive more fuel-efficient cars and buy less gasoline.

Those states who have taxing systems that are geared to the federal system, their revenues get adjusted when the federal tax system gets adjusted, so there’s a lot more volatility. So, what Sue said is absolutely accurate. That’s one of the major problems.

JEFFREY BROWN: In terms of the demands on the states — and we have talked about this before on the program — one you have been interested in is the pension, the problem with pensions.

Now, fill that picture in a little bit. What kind of obligations are states under and underpaying at this point?

SUSAN URAHN: Well, our last report showed about a $1.38 trillion gap between what they have promised to pay — that’s pensions and health care — and what they have actually set aside to pay it.

It’s a long-term liability, but basically we have seen increasing amounts of stress that states are facing on this. And it’s not every state, but it’s a fair number of states across the country. So I think the states that Lt. Gov. Ravitch looked at in his report are pretty representative of what we’re seeing nationally.

JEFFREY BROWN: That’s — go ahead.

RICHARD RAVITCH: I have a lot of respect for the Pew Center studies, but we think the problem’s far more severe.

We think just with respect to the — the health care liabilities to public employees, that the unfunded amount of that throughout the country is in and of itself in excess of a trillion dollars. And we think the underfunding of pensions depends on the interest rate assumptions you want to make about what those pension funds are going to earn.

And if you assume that they are going to earn 7.5 percent to 8 percent, then the underfunding of pension funds is in the billion-dollar category.

JEFFREY BROWN: Now, you’re suggesting…

RICHARD RAVITCH: And if you assume — well, we don’t try to take a position on what the right interest rate assumptions should be, but there are an awful lot of people who think in the economy that we’re living in, which is like — we’re likely to be de-leveraging for some period of time, that 7.5 percent, 8 percent is not the correct assumption.

JEFFREY BROWN: But you’re also suggesting that states are using these pension funds to help mask — and you were talking about this earlier — mask the larger problem.

RICHARD RAVITCH: No.

JEFFREY BROWN: That is a place that — an attractive place they can go?

RICHARD RAVITCH: No, I think people are borrowing not for that reason. Although in New York State, they made the grievous mistake of passing a law which enables the state and the cities and the counties to borrow from the pension fund to make the payments that they’re statutorily obligated to make.

And in states of New Jersey and Illinois, there’s no requirement that the state make the payments to assure that their funds are actuarially sound.

JEFFREY BROWN: Susan, we were looking, watching the rest of the other — rest of the reports out today and the sort of a fiscal cliff fears. Is it not possible that these demands and the cutbacks to the states will get even worse?

SUSAN URAHN: I think there’s a lot of uncertainty that states are facing as the federal government begins to grapple with the deficit.

The proposals that are going to be put forward are likely to have a significant impact on states. One problem is that the federal government is not necessarily paying enough attention to what those impacts are going to be, but states will feel it when the federal government starts to cut. Federal, state and local finances are all very intertwined.

JEFFREY BROWN: So, what do you call for? What can happen sort of quickly?

RICHARD RAVITCH: Well, we don’t attempt to tell the elected officials of this country how to apportion the cost of this between the recipients of public services, public employees or taxpayers, because, in a democracy, there’s no absolute right or wrong answer. That’s a question that should be resolved through negotiation and compromise. That’s what our elected officials should be doing.

JEFFREY BROWN: But you’re saying be clear about the problem.

RICHARD RAVITCH: But I’m saying be honest about it. Stop using borrowed money and proceeds from the sale of assets and treating them as revenues.

Match your recurring expenditures with recurring revenues. Do five-year projections. Inform the public, not mask the truth. Tell people that we are — have a serious structural deficit in most states that the cities and counties of this country are going to bear the greatest brunt of this. And the impact is going to rest in most severely on education, on infrastructure investment.

JEFFREY BROWN: All right, Richard Ravitch, Susan Urahn, thank you both very much.