Its the time of year for State of the State addresses. If they are
honest, governors old and new will offer the same stark message
states are in deep trouble.
Despite all the talk of the federal deficit, and its plenty bad, many
states are now facing calamitous deficits. Unlike the Feds, states
are confronted with constitutional requirements to balance their
budgets and they cant just borrow from China or print more money.
According to the Center on Budget and Policy Priorities, only Alaska,
Arkansas, Montana and North Dakota are not facing a deficit. Every
other state is in trouble.
Some state deficits, at least on paper, seem insurmountable. Eight
states have deficits that represent more than 30% of their budgets.
Michigans deficit, which is less than 10% of the budget, pales in
Then theres Nevada. Theyre #1 in foreclosures and fully 67% of
their homes with mortgages are now under water (the home is worth less
than the mortgage). Their deficit this year will be an
incomprehensible 54% of the budget. If they cut their spending in
half it still wont be quite enough.
We continue to bark at the politicians to stop spending, start cutting
and live within their means like we do. Of course, we do no such
thing. According to the Federal Reserve, weve racked up $2.7
trillion in personal debt and that excludes mortgage debt.
Besides, virtually every state has already started drastic cutting.
The last two or three years has seen a bloodletting of unprecedented
proportions in state and municipal budgets across the country. States
have used almost all the accounting tricks, delayed every payment they
could, hacked away at perceived waste, fraud and duplication and are
still coming up short as property tax, income tax and sales tax
revenues continue to sag.
In most states, the bulk of the budget goes to K-12 education,
community colleges and state universities and healthcare costs
associated with their Medicaid programs. In Michigan, public
education and healthcare consume nearly half the budget.
So what do we cut? Public schools are struggling as it is. Do we
eliminate art, music and other non-core classes? Close school
libraries? Eliminate school nurses and counselors? Eliminate all-day
kindergarten and pre-K learning? Do we dramatically increase class
sizes? Do we slash away at the benefits our teachers have been
What about state-funded healthcare programs for low-income families?
My old stomping grounds in Arizona, now faced with a deficit thats
nearly 37% of their budget, has already eliminated organ transplants
and the governor has proposed eliminating 280,000 low income adults
altogether from their Medicaid program. It will save them more than
$500 million annually, at least on paper.
But no healthcare does not mean no illness. Those who might have made
it to a doctor early in a health crisis, or who might have had a
serious problem nipped in the bud with an annual preventative
check-up, will now use the healthcare system only in emergencies.
That means going to an emergency room where federal law requires they
be treated. That means much more uncompensated care costs landing at
the door of the hospitals. And it means lost revenue they would have
received from the states Medicaid program. As a bonus, states that
carve up their Medicaid programs may lose federal funding. That means
healthcare costs will increase, not decrease.
How did the states get in this mess in the first place?
We need to back up to the Clinton Administration. Times were good.
Real personal income was growing for the first time in two decades.
The stock market was on an upward slope many thought would never end.
Pension funds and investment portfolios were creating new
millionaires, at least on paper, day after day.
States were awash with revenues as we bought houses, cars, appliances
and other big ticket items. Private sector job creation was cruising
along at a record clip. Flush with all that new money, states started
hacking away at their tax rates while approving massive new spending.
Still, the cash flowed in and rates were cut even further.
What states did not do is protect their tax base or save money. As
long as the revenues kept flowing, Republicans and Democrats alike
just kept reducing rates and spending more.
Then the tech bubble burst and the markets tumbled. Investment
portfolios, including pension funds, took a big hit. So did tax
revenues as consumer spending began to stagnate.
States had committed to record levels of spending with a downsized tax
structure. When the housing market collapsed, states were screwed.
Revenues began to fall precipitously and there was no way to
compensate for the losses. State after state drifted into the red
until we ended up where we are today with 46 states trying to figure
out how to balance budgets.
Our past state legislatures spent wildly, saved little and diminished
revenue bases. Current legislatures are faced with impossible
choices. There are huge obligations, no money and, given the current
political landscape, no way to increase revenues.
Its a sad state of affairs.