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Posted at 2:06 PM ET, 02/18/2011

What's going on with state budgets

By Ezra Klein

Gov. Scott Walker's proposal to destroy most of the public-employee unions in Wisconsin is being presented as a way to cut state budget deficits. It's not really that, for reasons I've noted previously. Another way to see that point is to look at Virginia, which, as many conservatives have pointed out, doesn't have collective bargaining for public employees. So how's their budget looking right now? Er, bad.

State and local budgets really are facing problems, but their problems haven't been particularly well explained. The best treatment I've seen thus far is "Structurally Unbalanced" (PDF), a collaboration between the Brookings Institution, Arizona State University and the University of Nevada at Las Vegas. The authors look at four case studies -- Arizona, California, Colorado and Nevada -- to try to understand what's gone wrong in state budgets and why.

One of the main points of the paper is that you have to disentangle cyclical deficits from structural deficits. Cyclical deficits are the deficits we're seeing right now, most of them primarily caused by the financial crisis. Remember that before Lehman Brothers fell, states had the largest rainy-day funds on record -- a sign that they were managing their money fairly well by historical standards. Structural deficits are the problems states face over the longer term.

And they vary state to state. The paper concludes, for instance, that "California suffers from more of a spending problem than a revenue problem, a result of permanent spending increases that were introduced during years of economic expansion." On the other hand, Arizona is looking at more of a revenue problem. "From FY 1993 to 2010 the state cut all kinds of taxes, but 58 percent of the total reductions in nominal dollars came from the personal income tax; these reductions gave rise to a structural deficit that predates the current economic cycle." So this stuff is complicated. But "Structurally Unbalanced" is a good place to start trying to figure it out.

By Ezra Klein  | February 18, 2011; 2:06 PM ET
 
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Comments

The problems haven't been "well explained?" What a dainty expression! How about propogandized? Texas is facing a huge state deficit, in a state where only 18% of its public employees are unionized. Republicans are deliberately lying in an effort to destroy the middle class, a piece at a time.

Posted by: ciocia1 | February 18, 2011 2:13 PM | Report abuse

"California suffers from more of a spending problem than a revenue problem, a result of permanent spending increases that were introduced during years of economic expansion."

OMG, I never thought that I'd see this statement in a Klein column. Yes, overspending, not revenues is our state's problem. Please send this message to Jerry.

Posted by: Beagle1 | February 18, 2011 2:14 PM | Report abuse

Is it no surprise that Republican government officials want to cut taxes for the very rich, while simultaneously cutting benefits for the poorest Americans who are the most negativity effected group in the current recession?

Posted by: blueman3 | February 18, 2011 2:15 PM | Report abuse

It is all about prioritizes. Republicans want to send more money to the richest Americans and to the biggest corporations who ship jobs overseas.
While Democrats want to use more money to improve and provide education to our children; to provide health care to save our citizens lives; to provide infrastructure spending and green-energy which produced more American jobs then coal/oil; and to produce basic public goods that all American's use.

Posted by: blueman3 | February 18, 2011 2:19 PM | Report abuse

One problem with claiming that structural problems are actually cyclical problems is that Ezra is speaking about 2008 state revenues are "normal" revenues. In fact these are revenues that were inflated by the housing bubble. Property taxes would have been at unnaturally high levels therefore masking structural problems. When revenues were reduce to "real" levels post bubble, the structural problems are unearthed.

Posted by: MonticelloRob | February 18, 2011 2:41 PM | Report abuse

Since most state governments have limited borrowing capacity (and the ones that do get to borrow probably shouldn't anyway), it's probably not realistic to try to separate "cyclical" and "structural" deficits. States all have structural deficit problems because they fail to plan for the cycle.

The "largest rainy day funds on record" were still very small compared to the budget hole one could reasonably expect from even a moderately large recession (let alone a "Great Recession"). States took every opportunity to spend more and tax less during the better times, token-sized rainy day funds notwithstanding. We all knew downturns eventually occur, but we failed to plan for them, just as we seem to every economic cycle.

Real preparation would involve careful analysis of the cyclicality of revenues and spending, and creating rainy day funds sufficient to smooth out the cycles. We need big surpluses in good times, but we never force ourselves to do that. Our repeated mistake is to engage pro-cyclical budgeting, whereby we act surprised when a budget crisis is created every downturn and we treat ourselves to the point of barely managing to get by when times are good. Yay state politics.

Posted by: sanjait | February 18, 2011 3:46 PM | Report abuse

Why do so many have such a difficult time in blaming the true cause of all of these problems: the voters

Posted by: quarkgluonsoup | February 18, 2011 4:10 PM | Report abuse

California's problem is Prop 13 and the erosion of the tax base base which led to govt by referendum.

Posted by: srw3 | February 18, 2011 7:16 PM | Report abuse

In California the Gov & Legislature treat spend thrift University of California campus chancellors as untouchables. Consequently millions of $ continue to be wasted by the University of California Berkeley. An example of the waste that could be used to lower tuition follows. University of California Chancellor Robert J Birgeneau’s ($500,000 salary) eight-year fiscal track record is dismal indeed. He would like to blame the politicians, since they stopped giving him every dollar he has asked for,It’s not that Birgeneau was unaware that there were, in fact, waste and inefficiencies in the system. Faculty and staff have raised issues with senior management, but when they failed to see relevant action taken, they stopped. Finally, Birgeneau ($500,000 salary) engaged some expensive $3 million consultants to tell him what he should have been able to find out from the bright, engaged people in his own organization.
The campus chancellors at University of California need to be part of the deficit solution NOT the problem

Posted by: Moravecglobal | February 20, 2011 1:22 AM | Report abuse

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