August 7, 2022

Panel to Scrutinize Causes Behind Weak State Budgets

Americans who have wondered whether Illinois, California and other troubled states are slouching toward the fate of Greece may get their answer in the coming months.

Richard Ravitch, who won an emergency appointment as New York’s lieutenant governor during the 2009 budget impasse, announced a high-level new project Thursday to untangle the finances of the states and shine a light on their hidden debts.

“Whereas there is enormous public attention to the federal deficit, the problems of the states are very serious and nowhere near very well understood,” he said in an interview. “People have to understand this, and address it with the same degree of gravitas as the federal deficit problem.”

Mr. Ravitch will lead the project together with Paul A. Volcker, the former Federal Reserve chairman who is credited with wringing double-digit inflation out of the United States economy in the 1980s.

The project will look into the causes of the current fiscal problems of the states, to what extent they are the result of the 2008 financial crisis, and to what extent they are structural. The difference is important because structural problems will not necessarily go away as soon as the economy picks up again.

In his 17 months as lieutenant governor, Mr. Ravitch expressed concern that New York State’s annual budget dramas had become a self-sustaining chain reaction, with each year’s batch of accounting gimmicks and one-offs feeding an even bigger deficit the following year. Weaknesses in governmental accounting were making the accumulating shortfalls hard to see.

The new research team will also look at the way states are carrying out “mandates,” the services they are required to provide under America’s federalist system, like health care for the indigent. Since the 2008 crisis, the states have complained that they are legally bound by mandates they no longer have the resources to carry out. With the Obama administration’s fiscal stimulus running out this summer, the stage is being set for a major challenge of federalism.

In addition to studying the cause of the states’ problems, the research team will explore possible solutions, but not prescribe any course of action. States are considered sovereigns under law, and imposing new requirements on them is difficult, as the Obama administration has learned through the current court battle over the health care overhaul.

To keep the research from becoming unwieldy, the group will start by studying just five states: New York, Illinois, California, Texas and Virginia. Texas was chosen because it is prosperous but still has a significant budget deficit. Virginia was added to the mix because many observers believe it has the best fiscal practices. Illinois and California are on the list because of their low credit ratings.

New York State is on the agenda because of the size and complexity of its system of public authorities, which operate enterprises like hospital systems and toll roads, and are not bound by the rules that limit the amount of debt the state itself can issue.

Mr. Ravitch became interested in tracking state indebtedness during his abbreviated term as lieutenant governor. Known as a skilled negotiator who helped New York City avert bankruptcy in the mid-1970s, he was brought in to help with a budgeting process that had broken down. He dug into the state’s finances, saw that years of budget sleight-of-hand had papered over a major imbalance, and drafted a broad fiscal reform proposal.

His approach was to allow limited borrowing to cover operating expenses only if the state broke with the accounting skullduggery of the past. But his ideas were rejected by Gov. David A. Paterson and then by Andrew M. Cuomo, who was attorney general before becoming governor.

Sidelined, Mr. Ravitch continued to investigate New York State’s finances and to look for parallels with other states. He discovered an array of unsound practices, like using long-term debt to pay for short-term expenditures. In some cases, officials were violating conventional accounting practices, like selling public assets and treating the proceeds as found money.

In other cases, special accounting rules for governments were themselves at fault, making it possible for states to promise valuable retirement benefits to their workers without recording the true cost. (The accounting rule-making board for governments is slowly working on changes.)

Mr. Ravitch was surprised at how little uniform, accurate data existed, and eventually he decided to compile a database himself. Since completing his term as lieutenant governor in December, he has been raising the money from nonprofit foundations.

He and Mr. Volcker have assembled an advisory board from both political parties that includes several former cabinet members, Nicholas F. Brady, Joseph A. Califano Jr. and George P. Schulz, and the creator of revenue-sharing, Richard Nathan, among others.

The project will be led by Donald J. Boyd, currently a senior fellow at the Rockefeller Institute of Government in Albany.

Mr. Ravitch unveiled the research initiative in a speech Thursday at the Federal Reserve Bank of Chicago, which is holding a conference on the issue of fiscal sustainability.

Article source:

Speak Your Mind