The Looming Crisis in the States
For most of this year, the state of Illinois has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments. Faced with $4.5 billion in overdue payments, Illinois has proposed a precarious plan to sell its delinquent bills to Wall Street investors in exchange for cash, calculating that the interest it must pay the investors will be less than the late fees it owes.
It is no way to run the nation’s fifth largest state, and it is not even clear that investors will agree, but these kinds of shaky deals are likely to become increasingly common as the states try to cope with the greatest fiscal drought since the Great Depression. Starved for revenue and accustomed to decades of overspending, many states have been overwhelmed. They are facing shortfalls of $140 billion next year. Even before the downturn, states jeopardized their futures by accumulating trillions in debt that they swept into some far-off future.
But that future is not so distant, and the crushing debt has made recovery far more difficult to achieve. As The Times reported, Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s. The city of Prichard, Ala., has stopped sending out its pension checks, breaking state law and shocking its employees.
A state or city unable to make its bond payments would send harmful ripples through the financial system that could cause damage even to healthier governments. But if states act quickly to deal with their revenue losses and address their debt — and receive sufficient aid from Washington — there is still time to avoid a crisis.
The most immediate cause of the states’ problems is the decline in tax revenue caused by the downturn, just as the demand for services has increased.
Over the last two years, combined sales, personal and corporate taxes have fallen by more than 10 percent. Although revenue is likely to tick up slightly in 2011, federal stimulus money — which has been keeping many states afloat — is largely scheduled to expire. Renewing a portion of that aid would be one of the most effective ways to assist the economy.
Many conservatives have said the revenue decline is a good incentive for states to cut their spending. That is precisely what almost all states have done, because they are legally barred from running deficits. State spending fell by 3.8 percent in the 2009 fiscal year and 7.3 percent more in the 2010 fiscal year, the only significant declines since at least the 1970s, even as the cost of education and health care rose.
School aid, Medicaid, transportation, employee salaries, social services, courts — whatever there was to cut, states have slashed it, often at ruinous costs to the most vulnerable: the poor, the sick and disabled, students, tens of thousands of laid-off workers.
But cutting spending will not affect the heaviest burden: the accumulated debt that comes from passing off the biggest problems to future generations. States and cities have nearly $3 trillion in outstanding bonds, and more than $3.5 trillion in shortfalls to pensions. Promised health benefits alone are more than $500 billion.
Some states have tried to pretend their pension obligations do not exist. New York is shortchanging its pension funds, and Gov. Chris Christie of New Jersey, who claims to be so financially responsible, is the latest in a line of governors who have simply refused to pay the billions the state owes to its employee pensions. (Instead, it has often spent that money on tax cuts.) Public employee unions will need to give ground on pensions and other benefits, but it will be hard to start productive discussions if Mr. Christie and other governors refuse to acknowledge their obligations and bargain in good faith.
During the last year, 23 states raised taxes and fees, but only eight increased personal income taxes. Ultimately, states are going to have to acknowledge that more effective, targeted tax increases are inevitable, and can be achieved if they are structured properly. Governors also must explain to voters that they have cut spending. The nation’s richest taxpayers just got a windfall in the federal tax deal extorted from President Obama by Republican senators. States should not shy away from asking for more help from those most able to pay.
Too many newly elected governors have vowed not to raise taxes — including, unfortunately, Andrew Cuomo of New York — fearing giving bad news to voters who have not yet been told how dire things really are. Dan Malloy, the incoming Democratic governor of Connecticut, is one of the few who have been honest with their constituents, saying neither cuts nor tax increases alone can deal with his state’s $3.5 billion shortfall, one of the largest, proportionally, in the nation. “This is a time when people have to be on notice that they’ll be requested to participate in shared sacrifice,” he said recently.
Many governors claim tax increases are ill-advised during a recession, but more experienced economists say it is better to raise taxes on the rich than to lay off workers and cut spending, in effect offsetting Washington’s attempts at stimulus. The federal government missed a chance to begin to act rationally about its long-term deficit by giving away the store to the rich in the tax deal. States should not make the same mistake.
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