States Suffering From Boom-and-Bust Cycle

How did so many states and municipalities get into so much financial trouble? Primarily, they were lulled by the boom, then battered by the recession, and finally stuck with huge tabs healthcare and employee pensions, the Wall Street Journal reports.

State and local tax receipts rose a whopping 36 percent in the five years before the economy collapsed, and governments were happy to spend the windfall. When the recession hit, tax receipts plunged and vast shortfalls opened up in front of programs that had been flush with allocations in better times.

The obligations include higher bills for Medicaid -- which is expanded under the new health-care overhaul. Health spending as a share of overall state and local budgets keeps climbing and governments are having to pay for more of their residents’ medical care even as federal aid decreases.

Lastly, many state and local governments don’t have enough money to cover the retiree pensions and health benefits they negotiated with their public employee unions. A surging stock market in the 2000s made the balance sheets look strong until the crash came, leaving pension and benefit funds in some big states including Illinois and California distressed.

“Now governments need to put a lot of money into the pension funds or dilute the promises or, at least for new hires, move away from old-style pensions to the 401(k)-style plans common in the private sector, or all three,” the Journal reports.