NCPA - National Center for Policy Analysis


November 20, 2008

This time last year, many governors and state legislators were imploring Congress to let them spend more money; now, they are imploring Washington to bail them out.  This zigzagging is what passes for long-term budgeting in many state capitals, but earlier this year, more than half of the states grappled with budget deficits amounting collectively to nearly $50 billion.  Since then tax collections have fallen short of projections, producing further budget holes in nearly 24 states. 

But this is not the first time states have been caught in this trap, says Steve Malanga, of the Manhattan Institute's City Journal.  Why?  Because many fail to address their deep, structural budget problems during the good times, and fail to deal with huge and growing employee pension and benefits liabilities:

  • The average public sector worker earns 46 percent more in total compensation than a private sector worker, largely because government employers spend 60 percent more per worker on benefits.
  • States have collectively racked up $731 billion in unfunded liabilities for pensions and other retirement benefits but have only put aside $11 billion to fund $381 billion in future nonpension benefits.
  • Illinois, which has the largest percentage of unfunded pension liabilities among the states, actually cut its contributions to pension funds by $2.3 billion in 2006 and 2007 as stock market returns were rising.
  • California state and local governments are paying some $12.8 billion a year to finance public employee pensions, up from $4.8 billion in 1999.

States argue that they need federal aid to avoid cutting essential programs that hurt their most vulnerable citizens.  But the best argument for more aid is the obvious one: the federal government will do it because they've already agreed to bail out many homeowners and major financial institutions.

Unfortunately, more federal aid all but guarantees they won't use the current crisis as an opportunity to put their fiscal houses in order -- setting the stage for worse problems to come, says Malanga.

Source: Steve Malanga, "Our Spendthrift States Don't Need a Bailout," Wall Street Journal, November 18, 2008.

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