Failed States

After a long spending binge, governors go begging for a handout. It won't be their last.

Michael Flynn & Adam B. Summers from the May 2009 issue

(Page 3 of 3)

Taxes

About half of state general fund revenues come from taxes. In 2002 states collected $535 billion in taxes; by 2007 that had grown to $749 billion, an increase of 40 percent, or more than twice the rate of inflation and population growth (see Figure 4).

The robust growth in state tax revenue during this five-year period is only part of the story. The pace of this growth is notable: rising slowly out of the recession, increasing rapidly, and then beginning to taper off in advance of the general economic slowdown. In 2002–03, the rate was 2.4 percent. By 2004–05, it had leaped to 10 percent. In 2006–07 it was down to 5.4 percent—a more moderate level, but still far ahead of inflation.

The decline in the rate of tax revenue growth ought to have sent a signal to state budget drafters. Instead, they seem to have looked beyond the data and assumed continuing strong revenue growth. State budgets for fiscal year 2008, which were drafted toward the end of the period analyzed here, called for more than an 8 percent annual spending increase on average. Small wonder states had to make mid-year adjustments to their budgets in the middle of 2008 as the economy began to cool.

Golden Failure

In fiscal year 1990–91, California took in more than $38 billion in general fund revenues. In 2008–09 revenues are $102 billion. If the state had simply limited spending increases to the 4.4 percent annual average growth in consumer price index plus population, the state would be sitting on a $15 billion surplus this year instead of a $42 billion deficit.

A significant portion of California’s spending increase stems from the growth in state employees. Today there are more than 356,000 workers on California’s payroll, or 9.3 state employees for every 1,000 residents. The biggest hiring binges came during Gray Davis’ dot-com exuberance, and then again during the pre-recession Schwarzenegger administration (see Figure 5).

This increase in personnel is important because so much of the budget is devoted to employees’ wages and benefits, and because their pension benefits, which are locked into place for all current employees, are both colossal and precarious. The California Public Employees’ Retirement Security System, which until last year was the largest public pension fund in the United States, lost a staggering 20 percent of its value in just three months of 2008 (see “The Next Catastrophe,” February).

By chance, the National Governors Association held its annual meeting in Washington, D.C., the weekend after both the stimulus and California’s new budget were passed into law. Mark Sanford and Bobby Jindal, both considered possible future leaders of the GOP, drew early headlines with their Hamlet-like deliberations on whether they would accept stimulus money. (In the end, they narrowed their considerations to the unemployment insurance component of the federal mandate, a comparatively trivial sum.) Schwarzenegger, always a media darling, regained the initiative with his Obama praise and Sanford baiting on This Week. Pundits speculated hopefully that perhaps the new president would give Arnold a job once his term expires in 2010.

Martin O’Malley, Maryland’s Democratic governor, dismissed Sanford as “fringe.” Sanford shot back in The National Journal. “There is a larger problem if we get so Balkanized with ‘you-don’t-want-yours-give-it-to-me,’ ” he told the magazine. “That means nobody is minding the store.” On Fox News on February 22, Sanford described the stimulus as sounding “like the Soviet grain quotas of Stalin’s time—X number of jobs will be created because Washington says so.” He added that “one of the real issues here is we have $52 trillion in accumulated debt in Washington, D.C. And we don’t have a giant piggy bank that we can now raid now that times are tough. All this money is going to be borrowed from the future—from future generations, from Social Security. So in essence, we’re digging yet another hole for ourselves with regard to unsustainable spending.”

For more than two centuries, the states have been the laboratories of democracy. Whether they become laboratories of sound economics depends largely on whether Sanford’s words become real-world deeds.

Michael Flynn is director of government affairs at the Reason Foundation. Adam B. Summers is a policy analyst with the Reason Foundation.

Comments

High Every Body|4.7.09 @ 12:04PM|#

Love that pic!

Naga Sadow|4.7.09 @ 12:07PM|#

I bet you do you Skynet loving monster!

High Every Body|4.7.09 @ 12:11PM|#

NS,

Nothing wrong with Skynet. Nothing at all.

DO you know Sara Conner and what is her address?

|4.7.09 @ 12:15PM|#

Meh. Conan was the superior movie.

|4.7.09 @ 12:18PM|#

I'm a friend of Sarah Connor's. I heard she's here. May I see her please?

|4.7.09 @ 12:20PM|#

Why certainly! Nice jacket. . .and where did you get those cool sunglasses?

|4.7.09 @ 12:27PM|#

When the good times do inevitably come to a close, governors plead poverty and either ask the federal government for help or raise taxes on their beleaguered citizens.

Local governments are even worse.

As property values soared in Florida during the Real Estate bubble cities and counties got a huge revenue windfall and went hog wild with civic booster projects. It never occurred to anyone to ease the burden on taxpayers with a millage adjustment or to put some aside for the eventual downturn.

Now the mayor of Orlando is sitting looking at half finished condo projects with hundreds of unsold units and wondering how to pay for the new arena and center for the arts he and the Orange County pols promised.

Of course, it never occurred to the silly bastard to wonder where the fuck all the people who were going to pay a million smackers for a two bedroom in downtown fucking Orlando were going to come from.

O-town never been all that exciting but now the place looks like a fucking ghost town. A ghost town of high rises that smells like piss. A big incentive to stay in the suburbs.

|4.7.09 @ 12:27PM|#

Your clothes...give them to me.

Naga Sadow|4.7.09 @ 12:33PM|#

Talk to the hand . . . bitch!

High Every Body|4.7.09 @ 12:41PM|#

I'm a friend of Sarah Connor's. I heard she's here. May I see her please?

Yea, yea, use the movie version rather than the real version that I used.

BakedPenguin|4.7.09 @ 1:02PM|#

Issac - the good thing from all that is that Dyer's going to take it on the head on the next election.

The bad thing is, no one will learn anything from his mistake(s).

|4.7.09 @ 1:23PM|#

Who's going to beat him, Baked, Ken Mulvaney?

Oddly enough, Seminole County has weathered things a little better, I think. But then the civic fathers have tended to concentrate on basic services more than the kind of booster stuff Dyer and Crotty have been pushing.

They keep talking about all the cuts they've made up here but so far the only one I've noticed is the libraries closing on Friday.

|4.7.09 @ 1:25PM|#

Not that i have anything against Ken Mulvaney.

I've always thought an Irish bar owner would be a splendid mayor. :)

Menstrual Retardation|4.7.09 @ 1:52PM|#

"But instead of giving the money back to taxpayers or putting it in a rainy day fund, they pretend the good times will never end."

As governor, Jesse Ventura returned excess tax revenue to the citizens of Minnesota. Twice. Man, did that ever piss off the Democrats. He also put millions into a rainy day fund.

And then he just got weird.

|4.7.09 @ 2:16PM|#

Now the mayor of Orlando is sitting looking at half finished condo projects with hundreds of unsold units and wondering how to pay for the new arena and center for the arts he and the Orange County pols promised.

Oh, I doubt he's really wondering about it. I suspect he knows exactly how they will be paid for, and it won't be charitable donations, either.

24AheadDotCom|4.7.09 @ 2:18PM|#

One of the major problems with CA - one that Reason no doubt didn't disclose because it breaks their way - is that many of its political leaders frequently get confused about who they work for. Specifically, they sometimes think they work for the Mexicangovernment. A good example - not the best, but someone many have heard about - is Los Angeles mayor Antonio Villaraigosa.

Reason would point that out, except they support the same subsidies that people like Tony try to give to those "willing workers".

Paul|4.7.09 @ 2:29PM|#

24AheadDotCom | April 7, 2009, 2:18pm | #

One of the major problems with CA - one that Reason no doubt didn't disclose because it breaks their way - is that many of its political leaders frequently get confused about who they work for. Specifically, they sometimes think they work for the Mexicangovernment. A good example - not the best, but someone many have heard about - is Los Angeles mayor Antonio Villaraigosa.

Reason would point that out, except they support the same subsidies that people like Tony try to give to those "willing workers".

Moving on now...

|4.7.09 @ 2:44PM|#

R C Dean

My point was that it's not going to come from locally paid taxes since that well has been pumped dry. They're trying to get Federal and State funds, but the State's got a "budget crisis" too. So only one avenue left.

I think anyone with half an brain realizes now that "Federal Funding" is the favored vehicle of state and local pols since noone wants to raise taxes. With what is now accepted (by every one except some pesky libertarians and fiscal conservatives) as limitless Federal ability to borrow everyone can have tax-free spending.

Don't you love it?

hotsauce|4.7.09 @ 2:44PM|#

Shut the fuck up LoneWacko!

|4.7.09 @ 4:01PM|#

My point was that it's not going to come from locally paid taxes since that well has been pumped dry.

I suspect you will find out to the contrary. There is no tax so high that it cannot be raised. For Teh Children, of course.

They're trying to get Federal and State funds, but the State's got a "budget crisis" too. So only one avenue left.

Oh, well, if the local pols are trying to figure out which pot of tax money to dip into to help their well-connected buddies, I can understand their angst. I was just making the point that it will be tax money.

|4.7.09 @ 4:48PM|#

I was just making the point that it will be tax money.

Oh, I didn't think that was ever a matter in dispute.

I think the thing is, that while I find "tax and spend" obnoxious, I find "borrow and spend" obnoxiouser.

Somehow "obnoxiouser" does not look nearly as cromnulent on the screen as it sounded to me in my head. :)

|4.7.09 @ 9:06PM|#

Back during the high-flying dot-com days, our local city government was complaining that the State was siphoning away too much revenue and that we voters absolutely, positively had to approve new taxes in order to make it possible to continue "essential programs" and prevent cuts in city employment. I of course opposed the tax hike on general principle, but in this liberal haven it passed handily. I then responded with letters to the City and in online fora associated with our local newspaper that what the city should do with its new revenue is put it away for a rainy day, and proceed with adjustments and cuts as if the tax measure had failed. The good times would not last forever, I wrote, and we needed to arrive at a size and scope of City government that was sustainable. I didn't just argue abstractly: I pointed to a County in the Central Valley, where I once used to live, which had implemented pretty much my same advice and was now doing OK -- not well, mind you, but not passing the hat as my own local poobahs were doing, either. Of course, I was shouted down and called all manner of vile things for publishing that opinion. Some exhorted me to "Go back to that County if you like it so much," and never mind that I lived there only five years, as a kid, while I have lived here adult, taxpaying citizen and observer of the political scene for nearly 20 years.

I suspect that others around the country, who assessed things in the same way I did, and who prescribed the same ant-like remedies, were similarly marginalized and ignored by their local grasshoppers. So when I see such phrases as "It never occurred to anyone" used by Isaac Bertram and others, I have to point out that there were probably PLENTY of people, to whom "it" occurred. The problem is making sure that the opinions of such people carry sufficient weight in the political process. Given the ancient age of the "Ant and the Grashopper" fable, I conclude that the problem has been around for a long, long time and isn't going away anytime soon. How to break the pattern?

JA Merritt
Santa Cruz CA

|4.13.09 @ 1:34PM|#

They should let CA file for bankruptcy so that the outrageous salary and pension contracts can be settled/reduced/eliminated in court. Or since the states are receiving a bailout, state employees should have to pay a 90% tax on their salaries :).