"They screwed up, and now they are coming back with their hats in their hands saying, 'Help us, help us,'" says Ohio University economist Richard Vedder. Vedder's not speaking of airline executives but of America's governors, who are staring at a projected $15 billion in red ink. Like just about every other interest group, they're asking the federal government for help.
While some states still enjoy hefty surpluses, others are facing difficult choices. North Carolina has already increased taxes. Maryland is contemplating a hiring freeze and across-the-board cuts. In Ohio, the state is threatening to shutter a prison and a mental hospital. We've been here before. In the early 1990s, gaping holes opened in state budgets as the go-go 1980s gave way to the shallow recession of 1990-91.
What caused this emerging challenge in state finances? Not surprisingly, many state officials blame external factors, particularly the slowing national economy and the September 11 attacks. But the problem is more fundamental. "State and local fiscal problems are the consequences of a spending binge that took place in the 1990s," says Vedder, who's contributed to a forthcoming study of state budgets from the American Legislative Exchange Council. The boom of the late 1990s filled state coffers, and the good politicians spent two out of three surplus dollars, using the windfall of the tech bubble to fund programs at unsustainable levels. From 1995 through 2000, state budgets increased an average of 7.5 percent per year. Those days are over, but some states are still managing to grow.
Even as it uses its fiscal problems to justify tax increases, for example, North Carolina's budget is on track to grow 5.2 percent in the current fiscal year. "They raised taxes just enough to keep spending going," says John Hood, president of the Raleigh-based John Locke Foundation. "North Carolina went on a reckless spending binge in much of the 1990s," he adds, pointing to the $200 million spent to support the Global TransPark, a largely abandoned municipal jet port with a large office, and myriad museum and road paving projects that have wasted millions more.
These states' fiscal condition is neither unpredicted nor unprecedented. The Cato Institute has long been documenting the spendthrift ways of governors of both parties, warning that states have been ratcheting up spending to unsustainable levels. "It's a repeated cycle," says Donald J. Boyd, deputy director of the Rockefeller Institute, which studies state finances. "When times are good, states save a little, spend a lot, and cut taxes too." Boyd points out that the second half of the 1990s were most likely the best times ever for state finances. As a result, real state spending per capita increased by a quarter during the 1990s.
The governors have a plan: Get more federal money. They are trying to elbow their way into the misnamed federal stimulus package, asking for more money for Medicaid and even welfare programs, which have actually been a financial windfall since Clinton's 1996 reform. The entire idea of a federal spending stimulus program is wrongheaded, as it assumes that a dollar in the hands of a bureaucrat will be more efficiently deployed than a dollar in the hands of you and your neighbors. "It doesn't make sense having one level of government handing out subsidies to other governments," says Vedder. "It's piling inefficiencies on top of other inefficiencies."
The only long-term solution is for states to keep spending in line with realistic, long-term revenues. This means cutting spending from levels supported in the late 1990s. And when the next boom comes, states ought to split the windfall between savings and rebates. Otherwise legislatures and governors will once again make promises that the taxpayers can't afford to keep.