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Paul A. Volcker, the former Federal Reserve chairman widely credited with taming inflation in the 1980s, has found what he considers a new economic scourge to battle: shoddy state budgets that he contends push costs into the future for other generations of taxpayers to pay.
When the states live beyond their means in this way, Mr. Volcker said on Monday, their budgets may seem balanced every year, but they are in fact piling up hidden mountains of unpaid bills. The invisible mountains grow bigger every year and eventually become crushing — something that seems to be happening in several states this summer as lawmakers find themselves at a loss to close their deficits.
“The never-ending sense of crisis leads to stop-and-go funding of vital programs,” Mr. Volcker said in his first report on state finances since establishing the Volcker Alliance, a foundation devoted to rebuilding public trust in government at the federal, state and local levels.
Budget proposals drive the debate over state spending, Mr. Volcker said. But they show only one year’s proposed cash outlays, not the accumulated costs from the past or the bills being deferred for the future. Budgets show that the costs of government are increasing each year, he said, but they mask the true picture.
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That makes it nearly impossible to have a coherent public debate about priorities and fairness, Mr. Volcker said, adding, “These practices make budget trade-offs indecipherable.”
As a result, bridges and roads are being left to crumble, public schools and state universities are being starved, “rainy day” funds are being drained, and public workers are counting on pension plans that may melt down at some point, the report said. City and county services, like courthouses and jails, are being battered, too, because they get much of their money from the states.
Asked whether this might prove to be as big a problem as the self-feeding vicious cycle of inflation and stagnation that he faced as Fed chairman from 1979 to 1987, Mr. Volcker laughed and said, “It’s a different problem.”
“It’s like termites eating at a structure,” he added. “The building hasn’t fallen down yet. But if you get enough termites, the building’s going to get pretty rickety.”
Mr. Volcker was Fed chairman during the administrations of Jimmy Carter, a Democrat, and Ronald Reagan, a Republican. His report on the states said that neither political party could claim to have superior budgeting practices.
The report offered as case studies the recent budget experiences of California, New Jersey and Virginia. In a news conference on Monday, Mr. Volcker said they had been chosen somewhat arbitrarily, with the intention of showing a range of different experiences.
The data had to be pieced together from many sources because no single clearinghouse of information exists on state government costs and spending. Mr. Volcker said he intended to build on his findings and eventually devise a system for scoring the integrity of all 50 state budgets every year.
The main credit rating agencies may offer some insights, but their primary goal is to predict how likely the states are to repay their bonds. That is a different question from whether the states are allocating scarce public resources in the fairest and most effective way.
Virginia’s experience was offered as an example of a state that had already put relatively sound budgeting practices in place but was still having budget troubles after the latest recession. Mr. Volcker said its budget process was “more administrative than political,” requiring among other things that the governor and lawmakers rely on outside economists for revenue forecasts.
Though Virginia’s process has been giving rise to sound budgets, Mr. Volcker found, the state was still having trouble because it relies on a considerable amount of federal spending, which has declined sharply.
California offered more of a bright spot. In the past it engaged in a number of budget gimmicks, the report said, and its situation became so dire during the financial crisis of 2008 that for a time the state had to pay its workers with scrip because it did not have the cash.
TIMELINE
Tracking the Volcker Rule
Following the 2008 financial crisis, lawmakers restricted the ability of banks to invest and trade for their own accounts. But first, regulators had to agree on the rules.
But when California’s current governor, Jerry Brown, took office in 2010, he made hidden costs an issue, calling the pile of deferred spending and unpaid bills a “wall of debt” that had to be addressed.
He managed to make changes that have lowered the “wall of debt” to $24.9 billion from $34.7 billion. Notably, he persuaded California’s tax-averse voters to approve a tax increase through a ballot initiative. California’s top marginal income-tax rate, 13.3 percent, is now the highest in the nation.
Despite these fiscal improvements, Mr. Volcker said California remained saddled with nearly $200 billion of unfunded promises to pay retired public workers large pensions and health care benefits, roughly twice the value of its tax-supported bonds.
“It remains too early to tell if the state’s fiscal culture has changed permanently,” Mr. Volcker said.
In contrast to California, New Jersey is still producing structural imbalances, according to the report. It has been struggling from year to year by, among other things, taking money out of special dedicated funds and spending it on unrelated activities.
For instance, the state has raided hundreds of millions of dollars in toll revenue from the New Jersey Turnpike Authority and used the money to pay for the day-to-day operations of New Jersey Transit. The toll money was supposed to pay for highway construction and maintenance, not mass transit.
New Jersey also removed $1.8 billion from the Port Authority of New York and New Jersey that was saved when Gov. Chris Christie canceled a project to expand the aging tunnels that link New Jersey with Manhattan. Instead, the money was used on road projects in New Jersey. Mr. Volcker noted that the $1.8 billion would be exhausted by 2016 and New Jersey had yet to identify a new revenue source to replace it.
One factor that appeared to make such raids possible is that New Jersey’s official budgeting process is centralized in the governor’s office, giving the executive branch almost sole control over revenue forecasts and spending decisions.
“The governor has the final say,” Mr. Volcker said.
New Jersey also limits its budgeting process to a single year, unlike the growing number of states that make multiyear budget projections. Many other states require governors to take outside revenue forecasts into account when making the budget proposals that usually kick off the budget cycle in January.
Mr. Volcker became concerned about the financial struggles of states and cities after seeing how severely they were thrown out of balance by the financial crisis of 2008. In 2012, he and Richard Ravitch, a former lieutenant governor of New York, established a project called the State Budget Crisis Task Force, which tried to document the problems.
As the task force was winding down its work in 2013, Mr. Volcker announced that he was setting up the Volcker Alliance, which would be dedicated to making government more effective.
“The palpable erosion of trust in our democratic institutions of government demands a response,” he said.
Paul A. Volcker, the former Federal Reserve chairman widely credited with taming inflation in the 1980s, has found what he considers a new economic scourge to battle: shoddy state budgets that he contends push costs into the future for other generations of taxpayers to pay.
When the states live beyond their means in this way, Mr. Volcker said on Monday, their budgets may seem balanced every year, but they are in fact piling up hidden mountains of unpaid bills. The invisible mountains grow bigger every year and eventually become crushing — something that seems to be happening in several states this summer as lawmakers find themselves at a loss to close their deficits.
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