This morning there are statements from four governors, Gov. Rendell of Pennsylvia, Gov. Schartzenegger of California, Gov. Patrick of Massachusetts, and Gov. McDonnell of Virginia, on facing their states’ budgetary problems in an op-ed in the Wall Street Journal. Gov. Rendell proposes economizing on purchases, particularly healthcare and points out his state’s wellness plan and increasing economies of scale in the state’s public employees’ health insurance. Gov. Schartzenegger takes not of the elephant in the room, public employee pensions, and reports his own state’s modest moves towards coping with the problem. Gov. Patrick suggests increasing investments, mostly in education. Gov. McDonnell points to his own state’s hiring freeze and requirement that new state employees contribute to their own pensions.
Information on the state budget of Pennsylvania is here, California is here, Massachusetts is here, and Virginia is here. In each of these four state’s budgets three quarters or more of all spending is in just two departments: education and health and human services (translation: Medicaid). In each of these four states the two greatest budgetary problems are public employees’ pensions and healthcare spending.
All four states are experiencing growth in the spending on their public employees’ pensions far in excess of the state’s growth in income or population and all four states are experiencing growth in healthcare spending in excess of the states’ growth.
There is no mystery about what needs to be done with public employee pensions. Public employee pensions must be converted from defined benefit plans to defined contribution plans, a transition which took place in the private sector decades ago. The great difficulty is what can be done about the years of profligacy during which public employee pensions were drastically underfunded. Some states may be able to escape this problem by reneging on their promises. Others will partially reneg and partially fulfill, presumably by raising taxes substantially. Other states may only be able to save themselves through bankruptcy. For still others and in this case I’m thinking of Illinois and its unique issues even bankruptcy may not be a solution.
Increases in taxes will certainly be part of any solution in Illinois but, since all of the revenue streams on which the state depends, e.g. retail, property values, income, are declining it means the state will be taking a bigger cut of the state’s income. At the margins that will result in at least some of the income fleeing Illinois.
In Illinois city and other local governments do not have the power to impose income taxes on their own so they are more completely dependent on property and sales taxes. Chicago’s sales tax is already among the highest in the nation. Illinois’s bizarre multiplier system results in a disproportionate amount of property taxes falling on homeowners. At the margins that will result in people on fixed or moderate incomes losing or leaving their homes, already a problem during a home mortgage based fiscal crisis.
I see no way that the states can solve their budgetary problems without healthcare reform that reduces costs, not by wishful thinking as with wellness programs but by real reductions now. But we’ve already had healthcare reform.
Frankly, this is a major reason why the “public option” should have – and still should – be passed. It would offer a real opportunity to rope up Medicare, Medicaid, and all the other government-provided payers into one arena. I suspect there’s far more administrative waste in that mess of systems than there is in all of the private ones.