Tags: Volcker | Ravitch | States | crisis

Volcker and Ravitch: States Facing Own ‘Fiscal Cliffs’

Sunday, 05 August 2012 09:24 AM

Former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch say the federal government isn't alone in facing a "fiscal cliff" — states are in for cliffs of their own, The Wall Street Journal reports.

Taking in "the totality of the problems," Ravitch and Volcker write, "the storm warnings are very serious" and the "existing trajectory of state spending, taxation and administrative practices cannot be sustained."

The two have been watching the balance sheets of six of the largest states — California, Illinois, New Jersey, New York, Texas and Virginia — since 2010.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

They found that Medicaid and pensions are the major problems, Medicaid is now the largest part of state budgets—24 percent on average. "The imbalance (or structural budget gap) can no longer be absorbed without significant cuts to other essential state programs like education or unpopular tax increases or both," Volcker and Ravitch say.

The panel also found that these costs are driven by states choosing to increase enrollment and create new benefits, rather than by rising underlying medical costs. For example, one of four New Yorkers is on Medicaid, and 70 percent of the coverage is not required by federal law.

The Ravitch-Volcker task force emphasizes that, unlike federal entitlements, state pension obligations are almost always constitutionally protected. In other words, they are non-modifiable contracts, not merely political promises.

Finally, Volcker and Ravitch found that states are running bookkeeping cons that disguise the fiscal realities. The task force uncovered "chronic dependence" on gambits like assets sales, "temporary" raids on rainy-day funds, and shifting current spending to future years "as an ongoing budget strategy."

The Los Angeles Times reports that California Gov. Jerry Brown’s
administration announced that $119 million more in untapped money was found in a sweeping audit of state accounts, bringing to more than $286.5 million the sum lawmakers were unaware of as they repeatedly cut government services.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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