Psst, Buddy! Wanna Buy Attica?
Pity the poor states. Many of them, especially in the recession-plagued Northeast, are facing huge budgetary deficits. That puts them in a bind, since almost all states are required by law to balance the budget every year.
As real as the states' plight is, the fiscal hocus-pocus performed by some state governments to cope with their deficits is deplorable (page 114 46 ). Remember the old joke about the guy who bought the Brooklyn Bridge? Several states, most notably New York, have been selling off assets--from prisons to stretches of highways. The buyers are typically state agencies whose finances are not included in the state budgets. The agencies raise the money by selling long-term bonds. The states, meanwhile, then lease the properties back and make lease payments to the agencies equal to the interest the agencies pay on the debt. Other states are financing projects by selling zero-coupon bonds, which don't require the states to make any interest payments until the bonds mature. Some governments are more direct. They simply sell long-term bonds to cover current deficits.
A major problem with such gimmicks is that they mortgage the states' futures to deal with today's shortfalls. Just as important, the sale-and-leaseback deals lure states into the notorious federal shell game of moving problems off-budget, where it is hoped voters won't notice the magnitude of the debt burden. And the state agencies that collaborate in these ploys by selling bonds undermine their own ability to do what they were set up to do.
States should abandon these gimmicks and pursue the only two solutions to deficits that, however painful, are really prudent: raising taxes and cutting expenses. We would emphasize cuts.