Tuesday, July 17, 2012

State Spending and Services ... Where and How Much to Cut? ... Education, Pensions, Health Care, Services, Infrastructure and/or Medicaid?

We can't have everything. That's the basic premise underlying economics.

Thus, choice in the midst of scarcity is required if we are to live within our means and avoid onerous debt levels.

It works that way for governments as well as individuals. Determining our priorities is essential as We the People make the required choices about where and how to allocate our limited resources.

And it's nonsensical for an individual state to expect the federal government to be able to fill in the shortfall at the state level. The feds are running trillion dollar deficits already, and their coffers can only be refilled by We the People, regardless of in which specific state we reside.

Thus, the debate about whether the federal or state government will pay for extending Medicaid coverage pursuant to ObamaCare is essentially absurd, at least in substantive terms.

Most individual states have too many financial obligations, including entitlements, for the revenue available to pay for them. It's really that simple.

State Finances on Unsustainable Path contains the latest update about the states' financial troubles and all that entails:

"Rising pension and health-care costs are hampering states' efforts to improve infrastructure and provide college education to lower-income students, according to a new task force.

A report by the State Budget Crisis Task Force, which is co-chaired by Paul Volcker, a former Federal Reserve chairman, and Richard Ravitch, a one-time lieutenant governor of New York, said the gap between entitlement costs and state revenues available to pay for them have become unsustainable.

"Our goal was not to say that the apocalypse is around the corner," Mr. Ravitch said at a news conference in Washington, D.C. "But that it will be a hell of a lot more expensive to deal with these problems five and 10 years from now than to deal with it now."

The report, released Tuesday, identified six major threats to the states fiscal sustainability, including Medicaid spending, underfunded retirement promises and accounting gimmicks designed to solve short-term budget gaps.

Mr. Ravitch, who is credited with helping rescue New York City from collapse in the mid-1970s, said too much political energy has been focused on federal budget problems and not enough at the state and local level.

The report doesn't offer any solutions to the fiscal problems, though it urges state officials to be more transparent about the true costs of pension and retiree health-care costs. It also admonishes states for using one-time revenue sources, such as asset sales and pension obligation bonds, to balance budgets.

The task force focused on the finances of five states: Virginia, Texas, New York, New Jersey and Illinois, and plans to issue separate detailed reports on these states in the coming months. . . .

Task-force members said federal officials have little understanding of how efforts to reduce the nation's deficit could further strain state budgets.

Ms. Rivlin, who served on President Barack Obama's commission that recommended federal deficit solutions, said they were aware of the impact that these cuts could have on states. "But we did not do a serious analysis of what would happen.""

Illinois as an Example

There simply is not enough money to pay for all the promises that have been made by governments at various levels over the years. And as an example, we'll look at Illinois.

Illinois began new budget year owing $7.5 billion has that state behind the proverbial 8-ball at the outset of its new fiscal year:

"Illinois began its new budget year staring at a huge stack of old bills. State Comptroller Judy Baar Topinka said Monday that Illinois had between $7.5 billion and $8 billion worth of old bills still left to pay when the new fiscal year began this month. That's slightly better than the total for the two previous years, when Illinois started out with about $8.5 billion in overdue bills.

When Illinois pays bills late, it means delays for the businesses and community groups that provide services to the state. They sometimes have to borrow money or cut staff to make ends meet. It also means money from the new budget goes to paying old bills, leaving less cash for the future. State revenues are up this year but so are costs."

Of course, Illinois is but one example of the financial fiasco underway throughout America.

Summing Up

Nevertheless, the federal government is expanding programs, including Medicaid, in the face of not enough money at either the national or state level. Who's kidding whom?

Individual states that are looking for a magical solution with new money flowing to them from the federal level are dreaming. The federal government has no money of its own. Of necessity it must borrow any new money that it spends, since its receipts in relation to expenditures are already short more than one trillion dollars each year.

The Democrats and President Obama's election year proposal to raise taxes only on what they describe as the "rich" wouldn't even make a dent in making our U.S. financial situation better. In fact, the total amount raised would be about 95% short of that needed to balance the federal budget.

Yet the Dems and the President won't ask the bulk of the voters--er--taxpayers to pay more in taxes. Or for that matter, tell us where the other 19/20 needed to fill the deficit hole will come from to balance the budget --- or even most of the budget deficit --- or even some of that trillion dollar deficit.

Meanwhile, the Republicans and Mitt Romney aren't doing much better than the Dems with respect to candor. They don't want to seriously discuss how they would propose to deal forthrightly with our Social Security, Medicare, Medicaid and public education spending issues, and the difficult choices that will have to be made to make the deficits disappear over time.

Together, the Democrats' reluctance to propose raising taxes across the board, when coupled with the Republicans' reluctance to tackle entitlements aggressively, will only serve to delay the inevitable day of reckoning. Of course, we'll need to do both at some point --- raise taxes and cut spending, both in the short and longer term.

Thus, the U.S. financial fiasco gets worse by the day, and it certainly won't solve itself.

And piling delay on top of delay will only serve to make an already huge set of problems even more difficult to solve as time goes by.

At least that's the picture I'm seeing. And it's not a pretty one.

Thanks. Bob.

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