Saturday, January 8, 2011

State Budget Crisis

Random Musings has a pretty good overview of the trouble with our state budget explained in great detail here.

I wanted to mainly summarize my reading of the article published on the Morrison Institute website because this is really important stuff.

The article's primary point is that our state is running both a cyclical but more troubling a structural deficit that will be increasingly difficult to resolve. The cyclical deficit stems from our current recession - tax revenue have fallen while at the same time there's an increased demand for government services - stuff like medicaid, etc.

However, the structural deficits are much more troubling because they persist even as we recover and they were primarily caused by:

"Less understood is the depth of the state’s massive structural imbalance, which has arisen thanks in large part to policy choices made during the go-go years of the state’s recent past but which will not soon relent. During the growth years, legislative and executive leaders acted as if the state could maintain a basic level of service provision even as it implemented tax cuts that permanently reduced the state’s revenue base."

How we deal with this structural deficit is key:

"With one-time fixes, gimmicks, and fund sweeps exhausted, budget cuts from this point forward could—if handled crudely—prove devastating and difficult to recover from. Serious discussions among state leaders have included opting out of Medicaid, cutting a K-12 system often cited before the recession for receiving the lowest per-pupil funding in the nation, and significantly reducing funding for the state’s university system. At the same time, if managed well (that is, with a balanced
approach and a sense of strategy and rigor) the crisis might actually prompt innovation instead of just pain.

I'm afraid our political culture here in Arizona is not well suited for dealing with this issue in a sophisticated way and that can have consequences if they aggressively cut services that are critical for the long term growth of our state (schools, say).

Sources of our structural deficits:

Tax Cuts

"Beginning in FY 1993, the state implemented tax cuts in every year through FY 2002, and again from FYs 2005 through 2010 (though in only about half of these years was the revenue reduction substantial). Nominally, the net changes during this 17-year period totaled some $1.7 billion. Adjusting for inflation, population growth, and real per capita economic growth, the cumulative impact climbs to $2.9 billion. All kinds of taxes were cut, but 58 percent of the total in nominal dollars came from the personal income tax.5 "

Spending Increases

"On the other side of the budget ledger, two major impacts on general fund expenditures have occurred since the structural deficit began in the early 1990s. First, funding for school construction was shifted into the general fund in FY 1999, with no additional revenue being provided. The annual expense has been as high as $500 million. Second, in 2000 voters passed two competing ballot initiatives to expand Medicaid by using tobacco settlement monies. However, the specified funding source was inadequate to support the expansions, so additional funding had to be drawn from the general fund. "

All of this has consequences, we've already seen a 20% cut in K-12 spending, 28% cut in university budgets, a cut in benefits to needy families (kicking out 8,200 families) and a termination of support for organ transplants funded by Medicaid.

One very important suggestion:

"Lawmakers should embrace balance as a watchword as they seek to stabilize year-to-year finances and narrow structural gaps. One sort of balance should be a balance of revenue- and spending-side responses. The state’s massive budget gaps simply cannot be responsibly closed with only spending reductions. A second sort of balance is that which arises from diversification of the tax system. The proliferation of tax reductions implemented in the state since the early 1990s have made the revenue system not only narrower, but also more vulnerable to cyclical variations in the economy. State leaders need to commit to a more balanced approach and to making the hard choices on both the spending and revenues sides of the budget to achieve it. "

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