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Major Takeaways From the Volcker Alliance’s New Grades for State Fiscal Health

South Dakota was the only state with an overfunded pension system, according to a new report.

South Dakota was the only state with an overfunded pension system, according to a new report. Shutterstock

 

Connecting state and local government leaders

COMMENTARY | New Jersey’s former budget director and state comptroller highlights some of the good, bad and the ugly budget practices.

Although the economy has recovered from the Great Recession, the Volcker Alliance in a new report released Wednesday underscored that the fiscal pressures for states have not disappeared.

The report, Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis,” graded the 50 states (from A to D-), examining budgeting practices from 2016 through 2018.

Researchers with the Volcker Alliance, which does advocacy and research related to public finance, joined with professors, teams of public finance experts and students on the report.

They noted that almost two-thirds of states are facing moderate to severe fiscal stress from the legacy costs of insufficient contributions to pensions and retiree health care despite the near record rebound of the economy.

The report also found that almost all states struggled with budget transparency and failed to fully disclose billions of dollars in deferred infrastructure and maintenance. Along with legacy costs, the growth of Medicaid and debt will continue to squeeze state spending on education, infrastructure and public safety, the report found.

The five critical areas evaluated by the report can be summarized as follows:

  • Budget Forecasting -- how and if states estimate revenues and expenditures for the coming year and the long term;
  • Budget Maneuvers – how much states depend on one-time actions to offset recurring expenditures;
  • Legacy Costs – whether states are funding promises made to public employees to cover retirement costs, including pensions and retire health care;
  • Reserve Funds – the level of funding for both general fund surplus and rainy-day funds and if governments have clear rules governing their use, replenishment, and relationship to historic revenue volatility;
  • Budget Transparency – how completely states are disclosing budget information, including bonded debt, tax expenditures, unfunded pension liabilities, and estimated costs of deferred maintenance.

The report is full of interesting factoids and specific examples of poor practices of various states. In terms of budget maneuvers, some states, for example, used one-time tobacco settlement funds to balance annual budgets and deferred Medicaid expenditures to a future year.

Failure to make required appropriations to fund pensions was a common problem with many states.

Several states received a low grade for transparency for failing to disclose information about deferred maintenance costs and not making clear how much outstanding debt and debt service costs they had.

A common finding is the failure of states to disclose multi-year forecasts in their budgets and planning documents regarding future revenue and expenditure projections—and in some instance the process states use to forecast revenue  was rated questionable.

No state received more than three As, according to the Volcker Alliance team. Idaho, Utah and California. Hawaii, Illinois, Massachusetts, New Jersey, Texas and Wyoming received average grades of D-minus in legacy costs, and more than twice as many states scored only a D in that category.

South Dakota was the only state with an overfunded pension system and the only other state with a 100 percent funded pension was Wisconsin.

Grades did not follow geographic patterns and larger and smaller states were equally likely to score well or badly. For example, of the five smallest states by population, Alaska received an A in transparency, while South Dakota and Vermont received Bs and North Dakota and Wyoming received Cs.

The Alliance observed that wide variations in population and tax and funding practices make it difficult to compare one state’s budget numbers against another and that is why they chose to focus on well-accepted best practices in the five key categories.

I am sure that many state officials will take some level of umbrage with the observations and conclusions regarding their specific grade(s)—“they did not speak to us to understand the full details of our processes”—or “they looked at the wrong data bases”—or “they simply did not understand why we did what we did.” In fact, there might be some mistakes, but in general the report is well worth reading if for no other reason than it examines and explains the five key parameters of what makes for good budgeting practices.

This report is also noteworthy because state government is big business—the states generate $2.1 trillion in annual revenues (10.3 percent of the nation’s gross domestic products) and together with local government—the latter very dependent on state funding—employ almost 20 million people. How fiscal policy in the states is made and executed is important and this report adds useful information to our understanding of such actions.   

Richard F. Keevey is the former budget director and comptroller of New Jersey, appointed by two governors from each political party. He held two presidential appointments as the deputy undersecretary of defense and the chief financial officer at the U.S. Department of Housing and Urban Development. He is a fellow at the National Academy of Public Administration and is currently a senior policy fellow at Rutgers University and a lecturer at  Princeton University’s Woodrow Wilson School of Public and International Affairs.

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