State Fiscal Strains Lingering in Recovery, Report Says

U.S. state revenue isn’t rising fast enough to keep up with the cost of funding pensions, health care and public works projects, underscoring financial strains that persist during the economic recovery, according to a report.

Paying for worker benefits is taking money from schools and other needs, according to the report, issued today by a privately funded panel of budget specialists led by former Federal Reserve Chairman Paul Volcker and ex-New York Lieutenant Governor Richard Ravitch.

“It’s great our economy is turning around,” Ravitch, co-chairman of the group known as the State Budget Crisis Task Force, said in an interview. “But it isn’t turning around fast enough to make up for all the liabilities that were issued, all the promises that have been made.”

State tax collections have been rising for the past three years as the economy revived and stock prices climbed, erasing budget shortfalls that forced spending cuts after the 18-month recession that ended in June 2009. The stability has allowed states to make up for cuts to schools and other programs or lower taxes.

State and local governments have made their finances appear better than they are by counting borrowed money as revenue, shifting expenses between years and putting off required pension payments, Ravitch said. His group called for an end to such methods, as well as greater disclosure requirements for state and local governments that raise money by selling bonds to investors.

Unfunded Liabilities

States are still confronting unfunded liabilities for employee pensions and health care because of investment losses or the failure to set aside enough to pay for future expenses. Since the recession, state pensions have slipped deeper behind, with the median having 69 percent of what they need to fully meet their obligations by 2012, down from 83 percent five years earlier, according to data compiled by Bloomberg.

Such shortfalls are well known in the $3.7 trillion municipal debt market, where investors have monitored them to gauge the risk of owning public bonds, and officials around the country have moved to change their pension systems. Illinois last month agreed to limit annual cost-of-living raises to shore up its pension, which had a shortfall of $100 million.

Pension Changes

While 43 states have enacted or considered altering pension benefits, most of the changes apply to newly hired employees and not those previously employed, who are typically protected by law, according to the task force’s report today.

The costs of pensions and other benefits for retired employees are generally growing faster than revenues, crowding out funding for health care, education and infrastructure projects, according to the report.

Federal spending cuts have also cast uncertainty over the outlook for states, according to the report, which also calls for the federal government to project how its decisions impact states. It also said states should exercise more oversight of local governments. Detroit last year became the biggest city to ever file for bankruptcy.

Lawmakers should consider giving the Securities and Exchange Commission power to require more disclosure by municipal borrowers, according to the report.

“The more disclosure, the more the public is protected,” Ravitch, the group’s co-chairman, told reporters today in Washington.

Ravitch said the report is intended to draw attention to long-term issues ignored by lawmakers.

The task force is funded by grants from groups including The John D. and Catherine T. MacArthur Foundation and the Peter G. Peterson Foundation.

(Corrects foundation’s name in final paragraph in story published Jan. 14.)
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