Fiscal Outlook

As the president of River Twice Research, where he analyzes economic and political trends, Zachary Karabell challenges common assumptions ranging from global economics to environmental sustainability. With a prolific, award-winning writing career, an illustrious background on Wall Street and a doctorate from Harvard, Karabell brings a unique perspective to the discussion of globalization, the domestic and world economy, the greening of business and the shape of things to come.

State legislatures face mounting pressures to further reform public retirement plans to achieve sustainable, sufficient and competitive levels. A major legal challenge facing many states is their ability to change benefits for current employees. This article reviews both legal and pragmatic issues, and offers specific options, policies and strategies to guide legislative reforms.

During the current fiscal crisis, most states in the Midwest have chosen not to enact broad-based tax increases — a trend likely to continue as new annual and biennial budgets are finalized. 

Former U.S. Sen. Alan Simpson has six good reasons for wanting to see the country address its debt problems. His co-chair on the National Commission on Fiscal Responsibility and Reform, Erskine Bowles, has eight reasons. Those reasons would be their grandchildren.

Question of the Month: Which states require supermajority votes in the legislature to pass tax increases? According to Americans for Tax Reform, entering this year, 16 states required a supermajority vote for taxes to be raised. 

States face colossal fiscal pressures, including mounting public pension obligations that now represent a $1 trillion unfunded gap, according to the Pew Center on the States. That gap—combined with other mounting fiscal woes—has prompted a discussion of something states haven’t discussed before—bankruptcy.

The national conversation now underway whether Congress should enact preemptive authority for states to file for bankruptcy is treacherous because of its unintended consequences. The mere existence of a federal law allowing states to declare bankruptcy would only serve to increase interest rates, rattle investors, raise the costs of state government, create more volatility in financial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution.

When President Obama's 2012 budget is unveiled next week, it will include a surprise gift to states indebted to the federal government for unemployment insurance trust fund loans. Administration officials are reporting that the president's proposal will include a plan to give states a two year respite from automatic tax increases and interest payments on unemployment insurance loans. 

For the past four decades, states have increasingly contracted with nonprofit organizations to carry out state financed human services. Due to tight budgets and budget shortfalls, services have been in jeopardy. Contract changes, late payments and alternate financing are just a few of the consequences.

A quick read of the headlines might lead one to think that state governments are headed the way of Lehman Brothers. However, a closer look at the tough decisions being made in state capitals across the country shows that governors and state legislators are confronting a historic state budget crisis head on. States know that there will be no more bailouts and are making the hard choices today on spending and taxes that Washington tends to ignore.

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