NCPA - National Center for Policy Analysis

Report of the State Budget Crisis Task Force

July 27, 2012

Serious reform is necessary in order to correct states' budgetary imbalances and ensure their fiscal solvency into the future. To this end, it is first essential to identify and resolve those problems that are the primary drivers of states' deficits, says the State Budget Crisis Task Force.

  • Medicaid spending is consuming an ever-growing share of states' limited resources -- it recently surpassed total spending on K-12 education, and expenditures on the program will almost certainly continue to grow, if even at a slower pace.
  • Actions by the federal government to address its own deficit could threaten to exacerbate the financial woes of the states; reductions in grants, federal projects and stimulus assistance could undermine states' already tenuous position.
  • Unfunded liabilities, specifically those of retirement funds for public workers, will almost certainly create significant problems for future state administrations.
  • States' sources of revenue are increasingly volatile because of their growing reliance on sales taxes, which are vulnerable to fluctuations in the business cycle.
  • Additional pressure is placed on states by their local governments' fiscal concerns: as municipal authorities are increasingly unable to cover their traditional share of costs for joint ventures like education, states are increasingly expected to step in and make up the difference.
  • Many states are repeatedly trapped by their own financial rules, which subsequently inspire creative accounting gimmicks and sidestepping that fail to address the true problem.

These problems are broad and, as a consequence, intimidating to tackle. However, equally far-reaching reform can address many of these issues.

  • States should take advantage of multiyear fiscal planning.
  • States should make greater use of rainy day funds.
  • States should cooperate with the federal government to control rising health costs.
  • States should implement diverse and broad-based tax structures that are less vulnerable to economic downturns.
  • States should exercise greater oversight over local governments to verify financial health.

Source: "Report of the State Budget Crisis Task Force," State Budget Crisis Task Force, July 2012.

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