States Fail Fiscal Health Check-Up
The Mercatus Center at George Mason University published a report Monday penned by Harvard economist Jeffery Miron that attempts to examine the fiscal health of each of the 50 states. The recent debt ceiling fracas in Congress prompted an extended discussion of government debt and its relation to GDP on the national level, but less attention was given to state and local governments. Perhaps one reason that little heed is paid to the financial situation of state governments is that every state except Vermont is constitutionally required to balance their budget each year. This doesn't comfort those familiar with state finances who know that states are able to hide billions in debt outside of their General Fund, like Jeffery Miron. Miron seeks to bring to light many of these troubling debt issues and paint a picture of the shipwreck awaiting every state if they fail to alter course soon.
Miron's report shows varying scenarios for state debt which depend on whether or not pension liabilities are included in the total figure, similar to work done by SBS. Miron's largest contribution comes when he provides a simple forecast of state expenditures and revenues to predict when state debt will reach unsustainable levels. To make his predictions, he added the interest on currently held state debt to the predicted difference in revenues and expenditures in the future, relying on broad assumptions about a steady rate of growth in expenditures and revenues and a constant interest rate. Simple though they may be, these predictions offer a valuable wake-up call for legislators at the state and national level.
Do these predictions actually indicate what is going to happen in the states? No. Rather, they show what would happen if current patterns of spending didn't change. In other words, they provide a snapshot of the ultimate consequences of today's fiscal irresponsibility; every single state will have over a 90% debt to GDP ratio in the next two to three decades. To his credit, Miron shies away from a dynamic forecast which would attempt to model the evolving relationship between debt, expenditures, GDP, and revenue. Instead he presents simple and transparent predictions which lay bare the lack of responsibility in the decisions being made today.
Miron actually finds that the much-discussed pension liabilities states hold will play a relatively minor role in the growth of the overall debt burden. According to Miron, it is the massive growth in healthcare expenditures under Medicaid and the Patient Protection and Affordable Care Act that will sink state finances. This somewhat surprising finding is also potentially very troubling, because there is very little that states can do about it. Most state spending on healthcare is dictated by federal policies, which means that there will need to be a significant change at the federal level for states to have any hope of maintaining solvency through the rest of the 21st century.
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posted by : Marks
Saturday, November 26, 2011 at 07:30 AM | Permalink