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What to do about the states’ budget crises?

By William Brangham and Jessica Wang

States and cities across the country are in financial straits right now.  The recent recession caused steep declines in state revenues (things like sales taxes, property taxes, income taxes) while simultaneously driving up the demand for government social services (unemployment assistance, medical care, and other social safety net expenses).   This one-two punch has left many localities reeling.

On top of that, the recession only exacerbated the longer-term budgetary problems that states were experiencing.   It’s what The Pew Center on the States recently called the “Trillion Dollar Gap” – the huge chasm between what local governments have promised to retirees in health, pension and retirement benefits, compared to what those governments actually have on hand to pay for those benefits.

Recently, an economic think tank called The Milken Institute convened a bipartisan group of leaders and scholars to propose some solutions.  They gathered government officials, representatives from unions, bond-rating agencies and the financial industry and asked them all to get creative in their thinking about what long-term fixes are needed.

According to the institute, “cutting back on services and increasing taxes won’t be enough.”   They argue states and local government will require more substantial shifts in the way they do business – everything from the way they pay their employees to how they fund their biggest infrastructure projects.  “This problem can’t be solved unless everyone takes a hit,” says Betty Zeidman of the Milken Institute.  She discussed their report on this video, and the complete report can be read here.

The group offers “back-to-basics approaches” from ideas of how to raise more tax revenue, to fixing areas of abuse in the pension system and establishing a standard and more accurate accounting method for pensions. Here are some specific strategies that they lay out:

  • Focus on multi-year budgets and create incentives for establishing rainy-day funds, instead of just scrambling to create a budget year to year.
  • Set up a control board – like New York did in the 1970s when facing near economic collapse. It’s essentially an apolitical, independent group, free of the burdens of having to face the political strains that elected officials face, that can come in and make difficult budget decisions in times of fiscal distress.
  • Encourage serious budget planning with a “race to solvency.” Similar to the “Race to the Top” fund established for education, federal aid would go to the states with the most promising fiscal strategies.

And above all, they advocate the importance of political will. They implore politicians to look past short-term re-election concerns for the long-term welfare of their state or municipality.

Take a look at what they suggest, and let us know what you think. Which solutions seem realistic, and which do you feel are off the mark? What are your solutions?

External Link Read the Milken Institute report.

Video: Are public employee unions to blame for states’ budget woes?

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  • lupinelover

    Tax the rich, then institute a living wage law – something along the lines of no stockholders of a corporation may be paid dividends until every employee is compensated with a livable benefits package, salary, health, disability and life insurance, and a pension.

  • Ann Freeman

    That second point, about an “apolitical,” non-elected board to make emergency financial decisions, seems like it would make any accountability difficult later. Also, who appoints these people, elected officials? If so, it sounds like a great way for officials to push their responsibilities onto others, then say to voters “don’t blame us, even though we appointed this board.” If the state in question had a majority that followed one ideology, wouldn’t their control board just reflect that, leading to the same stale ideas anyway?

  • Kathleen Smith

    Raise taxes on the Corporations at the federal level then put State level incentives in place that are dependent on jobs created, community improvements and product development that would help grow our country. The Corporations that truly help this country, should get the tax breaks….let them earn them instead of lobbying for them. Wall street needs to pay a percent of all their profits to reimburse the bailout money we gave them. Give all the pension money back to the public employees to invest as they wish, eliminate the public pension system but raise their compensation. Raise Social Security contribution to better secure that program.

  • Guest

    I think it is a good idea to diagnose the symptoms first before administering any medication.
    What caused the Budget Crisis now? Didn’t we have that situation before? What did we do then?
    We need to analyze every situation thoroughly before recommending any treatment.
    Something is not right here. Most of the wage earners, mostly from rank and file, pay their fair share
    and contribute toward their Social Security Tax, Medicare Tax, SDI, etc; however, many of the Corporations do not pay their fair share. Many of the financial institutions such as Bank of America, Wells Fargo Bank, and Citibank failed and did not do well. As a result, the Government had to bail them out using Taxpayers’ money. And we call ourselves Capitalists? Come on.
    Many Corporations pay Zero Tax. How? They did not generate any revenue at all? Unfortunately the numbers do not add up. Further the Network News Media also give an entirely different view on the economy. Not too long ago, the unemployment rate was 16.8% . Now we hear that it is 8.9%.
    Is that so? Wow! How did it change so fast?
    Good news is that some jobs have been created.
    But the bad news is all those jobs that were created were low-income jobs, which do not reflect any remarkable recovery. Quantity is not Quality and many American Consumers find it extremely difficult to make both ends meet. Honestly, many American families still live below poverty line.
    It is interesting to know when the Corporate Executives use high sounding language and modern terms in the name Cost Cutting Effort, reorganizing and restructuring their Offices. In other words, their move by relocating their existing staff from one location to another, which is far beyond their reach, causes major dislocation.
    What happened during the 1930s when FDR was the President is a lot different from what is happening today. We should not make any unfavorable comparison.

    Something is fundamentally wrong here. We must critically evaluate the situation on hand and modify the Corporate Income Tax Structure to suit the present day Economy.