States’ Recovery Will Lag Nation’s

State eNews Issue #41, March 3, 2010

Even as economists are touting the end of the Great Recession, states are still dealing with the challenges associated with the market collapse, housing bubble bust and a multitude of other fiscal challenges.

Ray Scheppach, executive director of the National Governors Association, said in previous recessions, states have faced their worst budget years in the two years after the national recession is declared over. The bottom line, Scheppach writes in the March/April Capitol Ideas, is not good: States aren’t likely to recover from this recession until very late in this decade.

Many factors are at play in this delayed recovery, not the least of which is the continuing shortfalls in state pension plans. The Pew Center on the States found in a recent study that states are short about $1 trillion on the promises they’ve made to employees in retiree benefits. A few states are fully funded but many are not, including eight states that fall below the recommended 80 percent funding level.

Girard Miller, an authority on public funds investment, said states have to get serious about addressing the shortfalls.

“The problem is every dollar you don’t pay toward your actuarial costs today will cost you $2 or $3 in the future because you don’t earn investment income on the money that should be in the fund,” he said.

Miller said states could go a long way in addressing the pension shortfall by making changes to the pension plans. Among his recommendations: Require a new or higher employee contribution, establish a limit on retiree medical benefits, and limit those retiree medical benefits before an employee is eligible for Medicare.

The pension problem has been growing over the past decade. States are also dealing with revenue shortfalls along with the impact of job losses and the housing bubble bust.

In fact, states are cutting to the bare necessities, although there’s always conflict about what constituents see as an essential government service.

In Virginia, for instance, a decision by the former governor’s administration to close some highway rest areas drew fire—even though it was projected to save more than $7 million a year.

“We understand that rest areas are an amenity people have gotten used to,” said Jeffrey Caldwell, chief of communications for the Virginia Department of Transportation. “But we couldn’t afford to operate as many rest areas as we had. There was no easy choice here.”

Gov. Bob McDonnell ordered the state to re-open the closed rest areas when he took office this year, even though the department isn’t sure where it will find the money to operate them.

Same thing happened in Idaho, where the Park and Recreation Board was looking to close two state parks to save money. The parks won’t close, but the parks department likely will suffer other major cuts due to the state budget situation.

But just what are a state’s core responsibilities? That’s a discussion elected officials and their constituents will need to have soon, said Scott Pattison, executive director of the National Association of State Budget Officers.

“I think there needs to be an acceptance and an understanding that there’s not enough money to do everything everybody wants state government to do,” Pattison told Capitol Ideas. “Something has got to give.”

One thing states are focusing on is job creation. That’s important, said South Dakota Gov. Mike Rounds, the 2010 president of The Council of State Governments.

“This national recession will cost jobs—some of which will not come back,” he said. “And as those jobs are permanently eliminated from the employment opportunities, other types of jobs have to replace them.”

Read more about how states are dealing with issues including unemployment insurance, foreclosures and cutting corrections costs in the March/April Capitol Ideas.

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