Wisconsin Gov. Scott Walker correctly points out that his state's current budget trajectory is unsustainable. But he's not alone.
The financial state of the states is not encouraging. Driven by irresponsible state and local spending growth, which outpaced private-sector growth by nearly 90 percent over the past decade, current budget deficits are estimated to exceed $100 billion for the upcoming fiscal year.
Bad as they are, these budget gaps are overshadowed in size and scope by unfunded liabilities in state pension and health care systems for public employees, which are trillions of dollars in the red.
As liberal former California Speaker Willie Brown recently put it: "At some point, someone is going to have to get honest about the fact that 80 percent of the state, county and city budget deficits are due to employee costs. Either we do something about it at the ballot box, or a judge will do something about in bankruptcy court."
The problem is that most of the legislative "fixes" over the past few years for state budgets have merely kicked the can down the road -- postponing or obscuring the problems, rather than solving them.
That has to end and, as Brown suggests, everything has be on the table, including a review of public employee pay and benefits.
Most importantly, states should consider replacing their defined-benefit plans pension plans with 401(k)-style defined-contribution plans for new employees.
According to the Bureau of Labor Statistics at the U.S. Department of Labor, as of 2009 state and local government employees not only earned more in wages than their private-sector counterparts, they received benefits that were 69 percent higher than those in the private sector. Of course, if states could grow money on trees, it would be grand for politicians to hand out "Cadillac" benefit plans to all workers. But in a world of limited resources, states must choose between needs and wants.
States need innovative budgeting strategies to address these new economic challenges -- without resorting to economically damaging tax increases. As the American Legislative Exchange Council's "Rich States, Poor States" study points out, tax increases come at a very high cost: the erosion of state economic competitiveness. In the words of President John F. Kennedy: "An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs."
States must move instead toward building priority-based budgets. In 2003, a bipartisan group of legislators in Washington state, along with Democratic Gov. Gary Locke, successfully implemented priority-based budgeting to eliminate a budget deficit of more than $2 billion.
To gain control of a state budget and develop priorities, the following questions should be answered:
- What is the role of government?
- What are the essential services the government must provide to fulfill its purpose?
- How will we know if government is doing a good job?
- What should all of this cost?
- When cuts must be made, how will they be properly prioritized?
By setting clear priorities and getting their public employee costs under control, states can show they are able to live within their means, just like taxpayers do.
Despite the economic difficulties facing the states, there is a pathway to budget reform and financial sustainability.
Jonathan Williams is the director of the Tax and Fiscal Policy Task Force at the American Legislative Exchange Council and co-author of "Rich States, Poor States" and "ALEC's State Budget Reform Toolkit." To obtain a complete copy of ALEC's budget recommendations, visit www.alec.org/toolkit.