EconomySTATE BUDGETS -- July 17, 2012 at 4:49 PM ET
States May Face Their Own 'Fiscal Cliff' Soon Enough
In March, thousands of students converged on Sacramento to protest budget cuts and fee hikes for the University of California system. Photo by Randy Pench/Sacramento Bee via Getty Images.
Undoubtedly, the debate over the federal debt will continue to consume much of the political oxygen as we head into the fall elections. But there's another looming problem that is much less discussed: a simmering budget crisis facing some of our most populous states.
Consider some of the numbers:
More than $1 trillion in unfunded obligations for retiree health benefits for state and local governments.
More than $3 trillion in underfunded pension obligations.
A decline in revenues from sales taxes by 37% over the last four decades.
The growth in Medicaid spending is now surpassing K-12 education as the largest area of state spending.
Those issues and many more are the focus of a new report of a task force looking at state budget crises, chaired by former Federal Reserve Chairman Paul Volcker and former New York State lieutenant governor Richard Ravitch. The report looks up close at the finances of six of the biggest states -- California, Illinois, New York, New Jersey, Texas and Virginia -- and finds a perilous situation in the making.
Ravitch, who grappled with these issues albeit unsuccessfully during his stint as lieutenant governor, is one of our guests to discuss this tonight. Among the biggest problems spelled out in the report: Medicaid spending that's crowding out other needs, underfunded retirement promises, budget gimmickry from both parties and an eroding tax base.
Ravitch and other members of the task force say it's not simply a budgetary matter. Like the worries about federal debt and the tough choices ahead, state governments are a major force and player in determining the country's economic health. State and local governments employ more than 19 million workers, or about 15% of the national workforce. They spend more than $2.5 trillion annually.
Already, states are being forced to make cuts. As Spencer Michels documented, there are are already cuts being made to the University of California system, which lost $750 million from the state in the past year. But task force members say there's much worse to come.
David Crane, a former economic adviser to Governor Arnold Schwarzenegger, put it this way to me: "Effectively social and cultural bankruptcy happens before financial bankruptcy in states. That's what you're seeing with some of these cuts now. The cuts will continue. The problem won't play out all at once. It's a bit like a frog slowly being boiled to death."
Consider this example with just one retirement system in California: Contributions to the California State Teachers Retirement System (CalSTRS) would need to increase by $3 billion annually to meet its obligations -- and that's assuming it earns 7.5% on its market investments each year. Pretty hard to guarantee that these days. Let's say its investments grow by just 2% less each year; CalSTRS would need to find an additional $7 billion to meet its obligations.
Watch the assessment of Ravitch and Susan Urahn of the Pew Center on States, from Tuesday's NewsHour broadcast: