Paced by California and Illinois, state governments across the country continue to mimic the unsustainable fiscal excesses of the federal government – creating crushing deficits and soaring unfunded liabilities. Moreover, any state attempting to plug these holes with tax hikes or other revenue enhancements could create an exodus of businesses and taxpayers – meaning fewer jobs, lost revenue streams and diminished political clout.
It’s a delicate if not impossible calculus for states with large shortfalls – and a cautionary tale for states facing smaller deficits. With the exception of Vermont, every state in America is required to submit a balanced budget. Many have refused to do so, however – resulting in mountains of unpaid bills, rising tides of red ink and widening chasms of never-to-be-kept promises.
During the 2010 fiscal year, states reported a record $191 billion in deficit spending. Another $300 billion in red ink is projected over the coming two years, according to the Center on Budget and Policy Priorities. Not only that, a July 2010 report published by the National Center for Policy Analysis estimated that state pension plans are underfunded by a combined $3 trillion – more than three times the amount that states are reporting.
How did things get so out of hand? Similar to the ongoing fiscal implosion at the federal level, one of the root causes of state insolvency is the unnecessary, unsustainable spending that preceded the economic downturn.
State and local spending soared from $1.74 trillion in 2000 to $2.66 trillion in 2007. Even after adjusting for inflation, that’s a 23.7 percent increase – which is comparable to the increase in federal spending over the same time period. Also, inflation-adjusted state spending in the seven years prior to the recession grew more than twice as fast as America’s population during the entire decade.
Yet while American families and small businesses were forced to cut back when the economy sputtered, politicians kept right on borrowing and spending. Now, as economic growth continues to lag and so-called “stimulus” funds begin expiring, the costs associated with a decade of unprecedented fiscal recklessness are assuming imposing dimensions.
In California, politicians must cover a $28 billion shortfall over the coming 18 months. On top of that, the state owes a combined $25 billion to its employment insurance fund and to local governments it has borrowed money from in the past. Additionally, a report from Stanford University recently estimated the state’s pension fund shortfall at half a trillion dollars.