From the Archives: Will 2011 state election voters feel enough pain to solve state budget crises?

Will 2011 state election voters feel enough pain to solve state budget crises?
December 4, 2010 1:22 PM MST

At the annual holiday dinner hosted by the Mercatus Center on December 1, economist Eileen Norcross spoke to the Charlottesville Libertarian Examiner about the impending crisis in state budgets. Norcross is a senior research fellow at Mercatus and co-founder of the web site StimulusWatch.org.

Norcross answered questions about state budget shortfalls and the “fiscal evasion” tricks that state governments play to create the appearance of balanced budgets. Most states, she explained, are facing serious consequences as a result of distended pension obligations and growing expenditures.

Some better than others
Still, she said, “there are a few states that are not in terrible shape,” such as South Dakota and Wyoming.

Some states are doing better because they “are simply smaller” and “don’t have as big of a public sector workforce. They don’t have the same pension obligations that some of the mismanaged states like Illinois and California do.”

Even so, Norcross warned, “all states are facing one crisis, and that is in Medicaid and rising health care costs. That is a feature of all state budgets.” Another universal feature, she added, is education spending, which “has been baked into the cake.”


Stimulus problems
Referring to research that shows that the federal stimulus money of the past couple of years may lead to budget problems for state governments in the future, Norcross cited research conducted for the Mercatus Center by Russell Sobel and George Crowley on the effects of intergovernmental transfers.

Sobel and Crowley “found that for every dollar of federal money that’s transferred to the state government, that raises future taxes by 40 cents,” Norcross reported.

Why is that?

“Once you undertake a public works project and the stimulus money goes away, you still have to finish that project. You have to pay for those workers [and] you might have to issue bonds to complete the project. In other words, they may have expanded commitments that they now have to fund themselves.”

2011 state elections

Eileen Norcross

In 2011, Kentucky, Louisiana, New Jersey, and Virginia will be holding state legislative elections, and these budgetary issues may have an effect on their outcomes but, Norcross cautioned, “that’s going to depend on the pain that the electorate feels.”

She said the case of New Jersey is “interesting,” because recently “when property taxes got so onerous on the average homeowner, [voters] actually turned out in force during the school budget election and they voted down a lot of school budgets in New Jersey.”

The number of school budgets rejected was “the greatest number since 1976,” she said, “because they were really voting against a tax hike.”

The results of next year’s elections, Norcross concluded, is “really going to depend on the extent to which the electorate is feeling the pain today or whether legislators are engaging in that kind of fiscal evasion, trying to buy more time, [and] pushing that debt onto future taxpayers.”


Publisher's note: This article was originally published on Examiner.com on December 4, 2010. The Examiner.com publishing platform was discontinued July 1, 2016, and its web site went dark on or about July 10, 2016.  I am republishing this piece in an effort to preserve it and all my other contributions to Examiner.com since April 6, 2010. It is reposted here without most of the internal links that were in the original.

From the Archives: Balanced-budget gimmickry hides states' fiscal crises, says Eileen Norcross

Balanced-budget gimmickry hides states' fiscal crises, says Eileen Norcross
December 4, 2010 12:58 PM MST

Economist Eileen Norcross, who specializes in state and local budgetary policy at the Mercatus Center at George Mason University in Northern Virginia, spoke to the Charlottesville Libertarian Examiner on December 1 about the impending crisis in state budgets.

She explained that states are experiencing persistent budget deficits, often as the result of ballooning pension obligations.

She noted that these budgetary shortfalls are taking place even though most states have a constitutional requirement to balance their budgets.

Balanced-budget 'gimmickry'
This happens, Norcross explained, because “it’s possible to have a balanced budget yet to grow spending every year.” There are different answers to the question, “What does budgetary balance mean?”

Norcross pointed out that “while on the books they can claim budgetary balance, they also engage in a lot of gimmickry, what I call ‘fiscal evasion.’”

Eileen Norcross

She explained:

“For years, states have been finding ways to balance their books without having to raise taxes directly, so they take on more debt, they dump trust funds into the general fund, they defer their pension obligations: That’s how some of these states have been balancing their books. It gives them the temporary illusion that they’ve met their commitments yet they really haven’t. That’s revealing a structural instability in these revenue streams.”

Noting that “Virginia is doing relatively well compared to the other states,” Norcross added that “there are a few things that concern me.”

For one thing, the Virginia state government “deferred [its] pension payment this year. It’s not a good practice.”

This is not unique, she said.

Pension obligations
“All the states have undervalued the size of the obligation that they owe to their public sector employees by an order of magnitude. What they claim on their books looks bad, but what they actually owe is far greater.”

In Virginia and other states, Norcross continued, “what concerns me is when [they] defer their pension obligations, they’re basically passing the buck [or] kicking the can down the road, but that’s not going anywhere. They’re going to owe those public sector workers” eventually.

In the third part of this interview, Norcross looks at which states are doing a better job, and whether fiscal matters will affect the behavior of voters in 2011 state legislative elections.

Publisher's note: This article was originally published on Examiner.com on December 4, 2010. The Examiner.com publishing platform was discontinued July 1, 2016, and its web site went dark on or about July 10, 2016.  I am republishing this piece in an effort to preserve it and all my other contributions to Examiner.com since April 6, 2010. It is reposted here without most of the internal links that were in the original.

From the Archives: Mercatus Center economist Eileen Norcross notes state budget ‘fiscal evasion’

Mercatus Center economist Eileen Norcross notes state budget ‘fiscal evasion’
December 4, 2010 12:43 PM MST

On December 1, the Mercatus Center at George Mason University hosted its annual holiday dinner, this year featuring novelist Christopher Buckley as after-dinner speaker. About 300 people attended, also hearing pre-dinner remarks from GMU economics professor Russell Roberts, co-creator of the viral video, “Fear the Boom and Bust” with rapping versions of F.A. Hayek and J.M. Keynes.

Economist Eileen Norcross is a senior research fellow at the Mercatus Center who closely follows state and local budgetary policy. Two of her recently published working papers are “Fiscal Evasion in State Budgeting” and “The Crisis in Public Sector Pension Plans.”

At the cocktail reception preceding the dinner, Norcross spoke to the Charlottesville Libertarian Examiner about the crisis in state budgets across the country.

‘Persistent budget deficits’

State and local budgets are an important research topic, she said, “because so many state and municipal governments are experiencing persistent budget deficits. They’re finding it difficult to balance their books and it’s projected that states are not likely to find fiscal balance until 2013.”

There are common reasons for this situation that cross state lines, Norcross explained.

“States have growing pension obligations that they have not funded. These bills are coming due. They’re going to have to contribute more to their pension systems to pay public sector workers. This is going to crowd out their ability to meet their growing Medicaid obligations.”

Workforce cutbacks

Eileen Norcross

Moreover, with state revenues falling, their spending grew “in the decade leading up to the recession,” she said. “They’ve built commitments into their budgets that they’re now finding it very difficult to cut. That means cutting back on the public sector workforce and other things have become very challenging for states.”

Even with money from the federal government, the situation is still serious.

“With the stimulus drying up they don’t have much to go on here,” Norcross said. “They’ve either got to raise taxes or find other places to cut.”

In the second part of this interview, Norcross answers questions about constitutional requirements for balanced budgets, deferred pension obligations, and the negative effect of stimulus money on state budgets.


Publisher's note: This article was originally published on Examiner.com on December 4, 2010. The Examiner.com publishing platform was discontinued July 1, 2016, and its web site went dark on or about July 10, 2016.  I am republishing this piece in an effort to preserve it and all my other contributions to Examiner.com since April 6, 2010. It is reposted here without most of the internal links that were in the original.