State Finances to Experience a 'Profound Shift'
Some states might soon be facing a come to Jesus moment. That was the sobering message this week from a senior analyst at S&P Global Ratings, who warned that a “profound shift” is occurring in state finances pressured by pension debt, slow revenue growth and demographic changes.
Gabe Petek noted Illinois, Kentucky and New Jersey are particularly vulnerable as they have persistently struggled to balance budgets during one of the longest economic expansion periods in modern U.S. history. But they’re not the only ones who should be put on notice. "This long period of relative calm may have lulled some people into complacency when it comes to state finances," he wrote in an editorial for The Hill. "It shouldn’t have."
In addition to slower revenue growth, declining worker-to-beneficiary ratios in state retirement systems and rising Medicaid enrollments "have meant that fiscal stress is no longer confined to recessionary times," he wrote.
The crowdout has resulted in lower investments in infrastructure and higher education. It’s also created an asymmetry for state finances, Petek noted, meaning the positive years have been mild while “the recent downdrafts have been severe.”
The Takeaway: Petek’s editorial comes amid a growing number of analysts warning that the new era of public finance has created a dramatic divergence in the credit quality of states and localities. The bottom line is some governments have adjusted their finances to be sustainable in the new era. Others have not.
Case in point: New Jersey Gov. Chris Christie has proposed moving the state lottery's nearly $1 billion in annual revenues into the state pension fund to help reduce its massive unfunded liabilities. Meanwhile, education and human services programs -- normally funded by the lottery -- would be paid for through the general fund. Still, there is no new money here -- the governor is merely moving dollars around.
For states that refuse to adjust to more constrained growth, Petek has one final warning: Congress can no longer be relied upon to help states in need. “We believe,” he says, “states can expect to largely go it alone the next time a recession strikes.”
The Human Cost of Not Having a Budget
A group in Illinois has tallied up the toll the state’s lack of a budget has had on its citizens. The results aren’t pretty.
The nonpartisan Responsible Budget Coalition's results included:
• 22,000 seniors outside of Chicago have lost access to services that keep them independent, such as home delivered meals and transportation;
• 130,000 low-income college students are not receiving tuition grants they otherwise would have received to help them afford college;
• nearly 47,000 children aren’t receiving affordable child care that allows their parents to go to work and;
• 80,000 people have lost access to needed mental health services.
In addition, higher education has weathered $2.3 billion in cuts that have roiled public universities throughout the state.
The Takeaway: Illinois has gone two years without a formal budget and has been relying on extensions of previously approved spending plans. While this has kept the government functioning to an extent, it has clearly led to many programs falling through the cracks. Chicago columnist Greg Hinz this week called the situation a disgrace and noted lawmakers have yet to deny any of the group’s findings. Will this serve as a wake-up call?
Connecticut on the Brink
Connecticut’s fixed costs are consuming its budget: 30 cents of every $1 it earns goes toward its long-term liabilities, such as pension costs, bond debt and retiree health care. That burden, reports Moody’s Investors Service, is the highest in all 50 states. And, Moody’s adds, these costs are expected to expand to 35 percent -- or $7 billion -- by fiscal 2019.
Besides the state's rapidly increasing pension costs and its willingness to continue issuing debt, what’s also notable here is Connecticut’s jobs shift since the Great Recession. Finance and manufacturing -- two historical economic drivers of income growth -- have failed to rebound to pre-recession levels. Finance and insurance employment is off more than 11 percent since 2007 and manufacturing has tumbled nearly 17 percent over the same period, according to Moody’s.
The Takeaway: Connecticut is one of those states S&P’s Petek was referring to when he warned that many would face a showdown with economic realities. For his part, Gov. Dannel Malloy is proposing major structural changes in the state budget that include concessions from state and local employee unions, passing on some pension costs to localities, restructuring state education funding and creating a local government option to levy property tax on some tax-exempt properties.
Moody’s says a plan “of this magnitude that results in recurring savings would go a considerable way towards stabilizing the state's credit profile.” But the reality of passing on a lot of these costs to localities -- some of them greatly troubled -- guarantees Malloy a tough path to passage.
To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.
