Jan | Feb 2014

‘It’s Like Paying for Dinner by Selling A Piece of Furniture’

By Mary Branham, CSG Managing Editor
Former New York Lt. Gov. Richard Ravitch, along with former Fed Chairman Paul Volcker, formed the State Budget Crisis Task Force in June 2011 in an effort to understand the fiscal problems faced by the states in the aftermath of the global financial crisis. The task force found states’ abilities to meet their obligations to public employees, to creditors, and to the education and well-being of people who live in those states are threatened.

What was the interest and impetus to starting the State Budget Crisis Task Force?

“(As lieutenant governor), I became aware of the fact that the budget of the state of New York was not what it appeared to be. … When I looked at the law that requires that New York have a balanced budget, I asked, ‘How could that be?’ and the answer was, ‘Revenue is not a defined term. ’Therefore, you could use anything to balance the budget, including money that you borrowed or money that you got from selling assets. To make a long story short, I found out most states had similar practices.”
What are the problems with those methods?
“That’s not a sustainable course. It’s like saying you pay for your dinner by selling a piece of your furniture. Eventually, you’re going to run out of furniture.”
What is different about this report and others addressing state budget shortfalls?
“It pointed out that we were, on the whole in most states, on an unsustainable course because Medicaid expenditures and retirement expenditures were growing faster than revenues. It pointed out that most states were using gimmicks to balance their budget. It pointed out that all of the proposals to reduce the federal budget deficit had catastrophic implications to state budgets.”
Is the report getting the attention and doing what you hoped it would do?
“It’s hard to tell because we’re in the middle of an election season and people aren’t focused on substance; they’re focused on perceptions at this point in the political cycle. I think the real measure will be after this election, when hopefully the Congress gets around to trying to address the deficit problems at one extent or the other. At what point are they going to look at the deficit reduction?”
What challenges will states face with federal deficit reform?
“There’s a real disconnect between the congressional delegation in a state and the state itself. This is a function of many things, including the collapse of political party. … If you look at the re-election of a member of Congress, … that contest is not filled with discussion about how many police or teachers are going to be employed. … People lose sight of the fact that state and local governments have major responsibility for education, public safety, public infrastructure, health care, … those are not the responsibility of federal government under our constitution. Of all the reform plans I’ve heard of for the federal deficit, not one of those people have done a calculation on the exact impact on state and local budgets.”
With all the discussion about decreasing the federal deficit and sequestration, states are facing some major challenges. How can they prepare?
“Multi-year budgeting, more disclosure, stop using borrowing to balance your budget, more transparency. Here’s an illustration: There are over a trillion dollars of OPEB (retirement benefits such as health care) liabilities on the part of states and instrumentalities in the states, i.e. cities. A totally unfunded set of obligations. Who knows that? Second of all, some states like New Jersey and Illinois don’t even require that the pension contributions be made to meet the actuarial determinations, so they’ve gone unpaid year after year, plus they’re dramatically underfunded. In New York, we passed a law—stupidly—to permit the pension fund of the state and pension funds of the cities in the state to borrow the money from the pension fund. They need to pay the premiums (that are) required. … We have become masters of kicking the can down the road.”
What would you tell policymakers about the urgency and need to act?
“I would say that they have an enormous responsibility for all the consequences of what they do, and not just what they do in the short term. That’s why you need multi-year budgeting and need an independent body to verify the calculations of what it should be. You have to look at this in the context of time. If you believe that our economy is going to be rebounding next year, you just have to get through this year. … That’s the way they’ve been budgeting. You have to look at the long-term trends.”
Are there some recommendations that would be a good starting point?
“I think the most important are more transparency (in budgeting), multi-year budgeting, make recurring revenues be matched by recurring expenditures, stop using the old-fashioned system of making budgets, … make them intelligently. A lot of people come into state office without any depth of understanding of all of the consequences of what they do. They feel if they can get through the next year or the budget cycle they’re about to embark upon, they believe that will solve the money problems. I don’t think it necessarily will.”
Is there the political will to address these problems?
“No. It’s very tough. It’s going to require politicians with a lot stiffer spines. We have a serious problem is all I can say, and that our politics are not very good at dealing with adversity and now we have a real test. We have a test in Washington as to what we’re going to do about the federal deficit. We have a test in the states. In a democracy it all comes down to politics. … I think the only way we’re going to solve this problem is if the political leadership gets everybody at the table and everybody is going to have to make the system whole again. That’s really the single most important thing I can say.”
Are you optimistic the problems can be resolved?
“I think the United States, a country I love, has overcome some pretty serious problems over the years. We solved the racial divide that some people thought we could never get over, and we have maintained our democracy unimpaired despite world wars, a cold war, recessions. We’ve done pretty remarkable things. We led the world to greater and greater freedom and democracy. I think we can resolve this problem. It’s a question of some people paying more taxes and some people getting less in benefits. It requires leadership.”