June 30, 2011
The Federal Reserve Bank of Chicago recently co-hosted a conference featuring analysis and discussion among local and national budget experts to better understand the fiscal condition of states and prospects for economic recovery after several years of ongoing financial stress.
The meeting was co-hosted by the by the Federal Reserve Banks of Philadelphia and New York in partnership with the John D. and Catherine T. MacArthur Foundation and the National Association of State Budget Officers (NASBO).
The first panel featured leaders of independent government research organizations from Wisconsin, New York and Illinois, who discussed their analysis and compared findings regarding their respective state budgets. The panel was moderated by Scott Pattison, executive director of NASBO, who established the framework for the discussion by summarizing some of the results of the group’s Spring Fiscal Survey of the States. Mr. Pattison explained that although state governments expect an aggregate revenue increase in 2012 of $13.6 billion, that is not enough to offset the loss of $66 billion in federal stimulus funds in 2011.
Civic Federation President Laurence Msall provided an overview of the issues facing Illinois as it moves forward with the FY2012 budget. As previously discussed here and here, the budget recently passed by the Illinois General Assembly appears balanced on paper. However, the budget contains hidden liabilities—unfunded expenses outside of the operating budget, such as Medicaid costs—that will eventually be reflected in future state budgets.
Don Boyd, a senior fellow at the Rockefeller Institute, presented an analysis of the State of New York’s budget issues. According to Mr. Boyd’s presentation, New York staved off large budget deficits through significant spending reductions and a temporary increase in the personal income tax rate beginning in 2009. However, like Illinois, New York faces underfunding of its known Medicaid costs in the coming years due to the loss of revenue from the expiration of the personal income tax increase at the end of 2011. The gap from the loss of income tax revenue will mostly be filled through gimmicks and one-time revenue sources, according to Mr. Boyd.
The President of the Wisconsin Taxpayers Alliance, Todd Berry, focused his presentation on the movement to reform collective bargaining rights of local government employees in his state. In addition, Mr. Barry discussed the expansion of Wisconsin’s Medicaid program, known as Badger Care, which grew from covering roughly 8% of residents in 1998 to covering 20% by 2008. Mr. Barry said that Wisconsin has been able to close any deficit in its current budget; however, the state will face a carry-forward deficit of $1.4 billion and a $1.8 billion increase in Medicaid cost due to demand in its coming budgets from 2011 through 2013.
After their presentations, the panelists agreed that each state still faced shortfalls in their coming budgets despite the perception of some economic recovery. These are mostly driven by the slow revenue recovery, loss of one-time revenue sources and the continued rise in Medicaid costs.
The subsequent conference panels featured academic analysis regarding federal influence on state budgets, political dynamics of state budgets and the basis of proposals to extend federal bankruptcy law to states.
All the materials and the agenda for the meeting are available on the Federal Reserve Bank of Chicago’s website.