A Hard Rain’s Gonna Fail

Mitch Daniels, governor of Indiana, writes of the hard times ahead for state governments:

State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.

Most governors I’ve talked to are so busy bailing that they haven’t checked the long-range forecast. What the radar tells me is that we ain’t seen nothin’ yet. What we are being hit by isn’t a tropical storm that will come and go, with sunshine soon to follow. It’s much more likely that we’re facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand.

The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.

I said it at the time but state and local governments (not to mention the federal government) made a serious error in the late 1990’s. When money was flowing into the treasuries, a byproduct of the dot com boom and general economic good times, was the perfect time to figure out how to re-engineer their structures to provide services more effectively and at lower cost. Instead, they expanded their payrolls.

The single most important reform that must be made in state and local governments is that pensions for public employees must become defined contribution plans rather than defined benefit plans. That alone will probably be enough to incite rebellion. But it’s a fiscal necessity.

Here in Illinois that will be all but impossible, requiring an amendment to the state constitution that will be bitterly opposed by judges, state representatives, state employees, and the representatives of local government employees, particularly the police officers’ and firefighters’ unions. That harsh reality is the reason that former Gov. Blagojevich’s cavalier raiding of government employee pension funds for operating expenses was not simply foolish but insane.

9 comments… add one
  • It also be helpful to get rid of balanced budget amendments so that state governments could run deficits during bad times instead of being forced by law to cut spending.

  • I don’t think that making higher interest payments will help most states, Alex. State and local governments have the problem that all of the revenue streams on which they depend are going down at the same time and, as Gov. Daniels points out, that’s likely to be the case for the foreseeable future.

  • Well, I agree re: revenue shortfalls, but states with BBAs have it even worse because they can’t even sell bonds to make up shortfalls.

  • Paul Link

    One solution would be to require that the state be required to spend no more than last year’s revenues and that 5% of all spending be set aside in a rainy day fund for times like this. Texas has a rainy day fund of $9 billion.

  • Drew Link

    “Instead, they expanded their payrolls.”

    That’s what government does, its their nature.

    “It also be helpful to get rid of balanced budget amendments so that state governments could run deficits during bad times instead of being forced by law to cut spending.”

    Absolutely. And then they’d run surpluses to get back to square in the good times. Right. We’ve all seen the magnificent results of this theory at the federal level.

    “One solution would be to require that the state be required to spend no more than last year’s revenues and that 5% of all spending be set aside in a rainy day fund for times like this.”

    A spending constraint? Egad, man! Don’t you know that all government expenditures are absolutely vital and necessary, and that there is absolutely no room for cutting or conserving?

  • Nalebuff Link

    USA = Anti-White Third World Shit Hole

    Let it burn to the ground.

  • steve Link

    This is not meant to be snarky, but shouldn’t conservatives be happy about this? After years of trying to starve the beast, they are having it done for them, and they have political coverage. Shouldn’t they be planning how to use this to keep government smaller?

    Steve

  • Who are these conservatives of whom you speak, steve?

  • steve Link

    LOL.

    Steve

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