A time for transformation

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States’ fiscal problems have never been worse, so what are they going to do about it?

By Bill Clements and Charley Shaw
Dolan Media Co.
World War II jolted the United States out of its last massive financial crisis, but with no global war to propel a recovery this time, states are scrambling to staunch the red ink splashing across their budget sheets.
In state after state, politicians and budget officers are dealing with dangerous declines in revenue that reach beyond the current national recession, and not even the billions of federal stimulus dollars pumped into state governments are doing more than delaying the worst.
Many states’ fiscal straits have reached uncharted waters: In Minnesota, officials are battling their first decline in revenue from one two-year budget period to the next.
From fiscal year 2009 to FY 2010, New York’s revenue crashed by nearly 34 percent.
In Arizona, one long-time lobbyist is predicting the state will drop into insolvency.
Such a dire prediction is no longer shocking.
As this conclusion from the National Conference of State Legislatures’ July 2009 report about state budgets puts it: “Without a doubt, lawmakers’ endurance to resolve extraordinary fiscal problems will be tested for years to come.”
During 2009, the year in which most state legislatures operated under the full burden of crushing revenue shortfalls, lawmakers fell back on the old expedients of raising taxes and/or ordering departments to hack away at jobs, and therefore, services.
With the expedients used up long before revenue is likely to recover, many states are resorting to a familiar stalling tactic, appointing task forces to study governmental change.
Even when the United States rises out of the worst recession since the Great Depression — the panacea many states are banking on — state governments will continue to see the red ink flow because their revenue increases usually lag behind national economic recoveries.
“The next 18 months to two years for states looks very bleak,” said Scott Pattison, executive director of the Washington, D.C.-based National Association of State Budget Officers.
Pattison is skeptical as well about prospects for a big post-recession economic bounce for states.
“What I keep hearing and I think there is a lot of truth to it … is the new normal is a level of revenue growth rate that is not quite as strong in the aggregate as it was in the late ‘90s,” Pattison said.
In their current form, public pensions, education, public safety, health care and other services are financial obligations that will continue to beleaguer states. But the current budget emergency means states haven’t been able to address the long-term costs of such vital programs.
“They have basically been put on the back burner while states deal with the immediate problem that is staring them in the face,” said Sujit CanagaRetna, senior fiscal analyst for the Lexington, Ky.-based Council of State Governments.
The blame for at least some of the states’ fiscal difficulties is the decades-long transformation of the nation’s economy from manufacturing to services. Many states haven’t adapted their tax policies to capture revenue on services. At the same time, manufacturing has withered.
“There is this leaky roof,” CanagaRetna said. “You’re putting a pan and hoping the pan will collect water when you really have to replace the roof.”
The challenge for state governments is to uncover innovative ways to provide services and obtain the revenue to pay for those services in a radically changed environment, said David Wyss, chief economist for Standard & Poor’s in New York City.
But politicians are the ones making the spending decisions for state governments, and the majority of them avoid any conflict that will threaten their political careers.
Gary Moncrief, a professor of political science at Boise State University in Idaho, which is reeling from the body slam of a 15 percent decline in revenue, said state lawmakers need to shed their political blinders to deal with the daunting budgets to come.
“I am not at all sure that the public recognizes the severity of the situation for next year,” Moncrief said. “And we are going to need creative political leadership, not dogmatic ideologues, to forge a solution that does the least damage to the long-term viability of the state.”
Lawmakers will face opposition from a diverse array of interests if they pursue significant, structural fiscal reform, but they have no choice. They have to come up with a plan to finance government in an environment in which there’s much less money to go around, Pattison said.
“The answer is, you’re going to have less,” he said. “There should be more focus on what programs are producing results.”
But that probably won’t happen right away.
Pattison sees structural government reform happening incrementally for years, rather than immediately in a single legislative session.
“I’m a big believer (in changing things) incrementally,” he said. “It will start to happen anyway because resources are so limited for states.”
Still, the reality is that states are overdue for fiscal reform.
“I think time is our enemy to the extent that there are some things we could be doing today,” said former Minnesota Department of Finance Commissioner Peggy Ingison.
Indeed, hard work is under way to push fiscal reform, but those doing the pushing are mostly public-interest think tanks and nonprofits, not the politicians who get paid to do such work for the public.
The suggestions include focusing state spending on health outcomes rather than services, developing a regional approach to county human service delivery, and providing choice and competition in local governments to improve quality and costs.
And Minnesota’s foundations are not the only ones investigating state government transformation. The Pew Center on the States is starting a study of what six states wrestling with long-term, structural budget imbalances are doing to uncover transformative ideas.
One of the states is Arizona, which needs the push. So far, what move has the state, like a dozen or so others, made to deal with the worst fiscal crisis since the Great Depression?
It has convened a task force.