Budget Shortfalls Will Dog States for Decades

Projected state/local budget shortfalls as percentage of GDP absent policy changes.

Projected state/local budget shortfalls as percentage of GDP absent policy changes.

Over the next 44 years, state and local governments face chronic budget shortfalls driven by Medicaid spending, government employee health care costs, and underfunded pensions, warns the U.S. Government Accountability Office (GAO) in a report issued earlier this month.

“Absent any intervention or policy changes, state and local governments are facing, and will continue to face, a gap between receipts and expenditures in coming years,” states the report. Closing that gap would require cutting spending by 3.3%, increasing revenues by a like amount, or implementing some combination of the two, stated the report.

Budgets eventually will come back into balance around 2060 when the demographic bulge of the Baby Boomer population passes from the scene, reducing pressure on Medicaid and pensions. However, fiscal pressures could become acute long before then.

The increase in health care expenditures will be relentless, drip-drip-drip year after year, driven not only by the cost of delivering care but the cost of providing care to an aging poor population. Unfunded pension liabilities are easier to sweep under the rug in the short-term but could become a crisis as pension funds burn through their accumulated assets.

States the GAO report:

While most state and local government pension plans have assets sufficient to cover benefit payments to retirees for a decade or more, plans have experienced a growing gap between assets and liabilities over the longer term. Our simulations suggest that state and local governments will need to increase their pension contributions, absent any changes to benefits or employee contributions in the future. Alternatively, state and local governments may need to take steps to manage their pension obligations by reducing benefits or increasing employees’ contributions.

Bacon’s bottom line: Analyzing the state/local government sector as a whole, the GAO report did not differentiate between the states. Clearly, some states will experience more severe budget shortfalls than others. My impression is that Virginia is better off than the average but that we still face a reckoning.

Virginia’s exposure to higher Medicaid costs should be less than the national average because Republican legislators blocked Governor Terry McAuliffe’s bid to expand the program as encouraged by the Affordable Care Act. Long-term, Virginia would have been responsible for funding 10% of the expansion. There is a trade-off, of course. The Old Dominion is foregoing an injection of federal dollars to fund medical coverage for the near-poor.

Also, Virginia did reform its state/local government pension plans under the McDonnell administration, keeping the old “defined benefit” plan for older state employees but implementing a hybrid defined benefit/defined contribution plan for new employees. State funding to the Virginia Retirement System also assumes a 7% annual return on VRS’s investment portfolio, less than the 7.5% assumed by other states. The actual return likely will be lower, I have argued, requiring everyone to pony up more cash than expected. Regardless, Virginia’s adjustment to economic reality will be less traumatic than that of many other states.

Meanwhile, House Speaker William J. Howell, R-Stafford, has been exploring a second round of reform at VRS. The state could save millions of dollars a year by paying less to outside money managers. Also, Howell has backed a 401(k)-like defined contribution plan for new employees, which shifts the risk of under-performing stock and bond indices from the state to employees.

Press reports have suggested that Howell is having difficulty getting traction. Perhaps Virginia should emulate the Social Security and Medicare Trust Fund trustees who annually publish projections of how long the Social Security and Medicare trust funds will last before the money runs out. It would be useful to know (1) how long the money in the Virginia Retirement System will last before the coffers run dry, (2) how much it will cost the state at that point to restore benefits to promised levels. Such knowledge might focus Virginians’ attention on the need to act sooner rather than later.

(Hat tip: Tim Wise.)

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18 responses to “Budget Shortfalls Will Dog States for Decades

  1. So.. if the rating agencies give Virginia an AAA rating does that mean the rating agencies are not seeing what the GAO is?

    I guess I would have thought that in order to receive a AAA rating – that these liabilities would need to be financially planned for.

    The idea of a portable 401K plan has two sides to it. What keeps many state employees from leaving is being vested in a defined benefit plan. Once they have more portable pensions – they will find other jobs easier to leave for – and of course the best employees who would fetch more money from the private sector will leave first.

    Finally the MedicAid issue is totally dishonestly portrayed by Conservatives – not all – some GOP states have expanded because it did save them money even if more people got covered.

    Several analysis have shown just that for Virginia also – so this is just partisan idiocy. We don’t turn down existing MedicAid money and nary one deficit-funded DOD job. We want MORE!

    First, existing MedicAid is only 1/4 for non-elderly… TANF recipients. 3/4 of it goes for nursing homes and long-term handicapped care. The part that is “growing” is boomer bubble..

    The expansion would not provide more nursing home care – it would cover people who have jobs but no insurance – the folks who currently who to ERs when they get sick as well as the people who quit their jobs and go on welfare or disability when they get sick and cannot get care.

    This is the dumb way to go about cutting costs. It’s like if you just ignore them – then you won’t have to pay.

    And in the end – what it really says to people who actually do work but can’t get insurance is – ” if you get sick, just die, because we’re going to do our level best to deny you getting treated and being able to continue to work”.

    we do this so we can spend taxpayer money on subsidizing those with 100K incomes to send their kids to college… and the elderly who own homes but want to preserve their wealth to give to their kids but want the state to pick up their nursing home costs.

    we want to demonize the poor – the “takers” – but the truth is , just like with mortgage deductions and tax exemptions for inheritances and employer-provided health insurance – we subsidize the middle income people and then blame the poor for being the ones causing the budget problems.

  2. Here’s how we spend Medicaid dollars:


  3. So the Iron Lady, Lady Thatcher, was right – eventually we do run out of OPM (other people’s money.) Unlike the federal government, the states and localities cannot inflate the currency to address any of this, and they cannot go into deep debt without real jeopardy, so — something gets cut or taxes go up. I bet it will be a bit of both.

    Since the troops were starving in the snow at Valley Forge, and Congress failed them shamefully, it has been evident that most Americans want things from government but do not want to pay for them. And if they keep voting for politicians who tell them that is possible, why would anything change?

  4. I remember back when Mark Warner was Governor. He came to McLean’s Dolley Madison Library to discuss his view that Virginia had a structural deficit and needed more revenue. I was fortunate enough to attend the meeting. As it turned out, Warner got many of his proposed tax increases. So why didn’t that fix the structural deficit? Perhaps, we have a spending problem, not a revenue problem.

    At least in Fairfax County, state and local taxes have been increasing at rates that exceed not only inflation, but also increases in household and personal income. To a person, every member of the Fairfax County BoS has said these levels of tax increases are not sustainable. So when do they make some big cuts? One of their problems (and that of any legislative body) is that those asking for more spending aren’t the same people/organizations being asked to pay more and more and more.

    Once again, despite voting for multiple bond issues and supporting the Clinton-Kaine ticket by a significant margin, voters in Fairfax County again rejected the meals tax. (I voted for it to diversify county revenue.) It’s time to swear off the ever-increasing use of OPM.

    Larry, not to reopen our ongoing Medicaid debate (which I’ve purposely tried to stay away from), but just answer one question directly. If expansion of Medicaid would save money (for both taxpayers and insurance premium payers), which means we as a state would spend less than we do on the existing system (which many describe as hodge-podge) and that the healthcare industry would get less money, why is the healthcare industry fighting so hard for Medicaid expansion? It makes no sense for an industry to lobby to change the law in a manner that would decrease the industry’s revenue. I conclude that the industry thinks that, over time, it will make more revenue (costing taxpayers more) by Medicaid expansion. Please show me where I am wrong.

  5. @TMT – here you go –

    more detail here: http://www.thecommonwealthinstitute.org/wp-content/uploads/2013/08/medex_pays_for_itself.pdf

    @Steve Haner and TMT – We DO have a “spending” problem – it’s funding for Higher Ed, taxpayer-funded nursing homes for people who could pay, K-12 where 1/2 of the spending is local discretionary and not for SOLs.., and subsidies to hospitals for folks who do not have insurance, prisons and law enforcement for the “war” on drugs…

    being fiscally conservative means you OUGHT to be willing to cut spending across the board not just on the poor ….

    All in all – McAuliffe has been one of the most fiscally conservative Governors in recent history in my view.

    his position on bonuses and not raises for teachers is especially unpopular – even the GOP opposes it!

  6. You know the REAL Crying might begin if Congress actually kills the MedicAid expansion then block-grants MedicAid… then the Virginia’s General Assembly will find itself confronted directly with that “structural budget” that they can no longer blame on Dems or prior or the existing Governor or “liberals”…

    I predict we’re going to see a series of events where heretofore double-talking politicos on MedicAid and Obamacare WILL get hoisted on their own petards when they end up with these issues thoroughly in their own lap.. and cannot weasel their way of it by blaming others.

  7. The 2004 tax bill did solve the structural deficit that was created by that car-tax promise. The GA didn’t eliminate the tax, instead it promised the localities that the state would pay the tax. That created a new expense in the state budget that was climbing rapidly toward $1 billion a year. THAT structural deficit got solved! (But even at that point I wondered whether the next tax hike would be caused by Medicaid and other health costs growing far faster per year than the state economy was growing.)

  8. The car tax thing was an unmitigated predictable disaster – and still is in my view. Why in the world the state would ever want to get into a locality property tax rebate/subsidy to start with? It was just bizarre. Gilmore apparently thought it was a way to force localities to cap car taxes? What kind of person thinks that way as a Governor? Not Kaine and not Warner!

    what Gilmore did was worse that the MedicAid deal.

    Folks blame Warner and Kaine but Gilmore did far worse.in my view and apparently is STILL PROUD of it!

    Medicaid is a budget issue because the State has not got the gonads to confront the real issue – and make the cuts necessary for the program to stop being a 600 lb gorilla.

    The real issue – the state CHOOSES to pay for nursing homes for people who own their own homes – they CHOOSE to allow Medicaid to be used as a wealth preservation program for the middle class – but we blame the 25% that actually get medical care which is dishonest and cowardly and evades the real issue.

    If Virginia wants to control MedicAid costs – they need to require every citizen to either get long-term care insurance or pay into a fund that will provide those who do not plan for that inevitable expense for many much like we require people to either buy car insurance or pay an uninsured motorist fee.

    It turns out that some of the most irresponsible folks are those in the middle class – who live the good life, buy a home, cars, even vacation homes and do not plan for costs at end of life – then want taxpayers to pay so they can then transfer their wealth to their kids.

    This is doubly terrible. First the basic idea that you’d try to evade your just responsibility – like those low-income folks we like to look down our noses at – and then the added insult of blaming them for the costs that the middle class is putting on MedicAid and threatening to bankrupt the state.

    I resent having to pay for the poor – but I resent even more having to pay for the so-called middle class… and I resent most of all the politics of blame when we ourselves refuse to own up to the real problem.

    • Gilmore’s car tax plan was the best thing that every happened to residents of Northern Virginia in the 30 plus years I’ve lived here. It took income tax dollars sent to Richmond by residents of NoVA and returned a portion of them before they could be used to subsidize RoVA’s already low real estate taxes.

  9. As Steve had said – Virginia got a structural deficit from the car tax because it put what amounts to an escalating and unpredictable budget impact on the State and crowded out other budget needs.

    Because of that – every year the budget was affected structurally by the car tax.

    There is no subsidy from NoVa to RoVa. It’s a made-up issue from folks who resent the school funding composite-index – which basically is required by the Supreme Court that all states provide equal funding for students regardless of where they live geographically even if the local jurisdiction lacks adequate resources.

    It’s even more hypocritical because NoVa itself is basically funded by deficit spending by the Federal Govt by taking taxes from other Americans and spending it in NoVA and don’t forget who pays for METRO also – other Americans!

  10. TMT – Based on the last election, I’d be careful. The General Assembly might look favorably on your next petition to secede…

    I’ve said it before but I will always remember doing research on a 1993 campaign and traveling the state, and discovering that every single region of Virginia was 110 percent convinced it was getting screwed by the distribution of state revenue and somehow I just could not reconcile those numbers! It boiled down to politicians who didn’t want to tell their voters the truth and survived by pointing fingers.

    If there are Northern Virginians attending every single state college (and there are, some complain too many) and if the downstate prisons and state hospitals have plenty of Northern Virginians residing (and they do – no supermax up there) and if the Northern Virginia economy is integrated with at least the rest of the I-95 and 64 corridor (and it is, unless you think things like the shipyard and the port are irrelevant to you), then you really should view this as a Commonwealth and not just complain that all your taxes don’t get spent 20 miles from home….or maybe we should build a supermax prison 20 miles from your home!

    • Steve – much of my objection arises from a meeting I attended with Vince Callahan, Janet Howell and Jim Scott. We talked about taxes, spending and state aid. Callahan explained that because the LCI does not require an actual minimum local real estate tax levy (as opposed to a real estate tax capacity), many localities are able to reduce their local support for public schools when state aid is increased. At the meeting, both Howell and Scott agreed with Callahan’s statement.

      In confirmation, a number of years ago, Chris Braunlich posted a chart on BR that showed after the Warner tax increase and increased state aid for K-12, 49 localities were able to reduce local funding to their public schools. I suspect Bacon could easily find the posting and provide a link to it.

      At the same meeting, the legislators indicated NoVA does well generally on transportation funding, especially when big projects are considered – Springfield interchange and the Woodrow Wilson Bridge for example. And they made the same points about statewide services. I’ve not complained about those.

      But the LCI is an abomination. Sure we should spend state money on K-12 education in poor jurisdictions. And no one reasonable expects dollar for dollar back from Richmond. But the LCI does not require a minimum local tax effort in terms of paying money to the city or county; fails to account for the tremendous differences in cost of living; and ignores the high number of poor kids in NoVA schools, including many non-English speakers.

      So until the GA fixes the LCI, I will continue to cheer car tax relief.

  11. The irony is that NoVa is, by far, one of the most heavily subsidized regions in the country in terms of Federal dollars spent there and those Federal dollars come from other taxpayers living in places like RoVa.. NoVa has been whining ever since the sequester passed Congress that is has been “hurt”.

    I bet RoVa would gladly take a tax cut to stop funding NoVa!

  12. re: ” Chris Braunlich posted a chart on BR that showed after the Warner tax increase and increased state aid for K-12, 49 localities were able to reduce local funding to their public schools.”

    I’m going to consider that FAKE news unless TMT can prove he’s not making it up! Earlier this week he claimed he had per school funding data and did not actually provide it… so TMT – put up or … admit it’s only in your own mind!

    • If you have the same email address, I just sent you the Braunlich chart. Still working on the other item, the woman who was doing the analysis is out of town.

  13. I’d be totally in favor of changing the LCI if TMT and others had actual data to back up their conspiracy theories!


  14. Okay – I’m eating my hat or crow or whatever. TMT did indeed provide the chart that demonstrates increased state aid and decreased local contribution and I would urge him to post it here so others can see it.

    but while I DO see increased state aid and decreased local effort – I do NOT see a lowered local tax rate. This change could easily be because the data that goes into the LCI showed lower county revenues…

    in other words the real smoking gun would be to show that AFTER state aid increased that the localities cut their tax rates.

    If a locality suffered economic reversal like plants or mines closing – they well could be receiving less revenue which in turn would increase state aid.

    but TMT – post that chart !! it’s interesting!

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