by James A. Bacon
Richard Ravitch worries that more “Detroits” are in America’s fiscal future. Co-author with former Federal Reserve Board Chairman Paul Volker of the “Report of the State Budget Crisis Task Force,” Ravitch argues in the Wall Street Journal today that state and local governments have major fiscal problems, that those problems are structural in nature, not a passing consequence of the Great Recession, and that “the crisis is deepening.”
An advisor to the Detroit bankruptcy judge, Ravitch makes a number of unassailable points: (1) Despite stop-gap measures to shore up employee pension funds, contributions remain below levels needed to meet promises to public employees; (2) the growth in Medicaid costs will continue to outpace state tax revenues; (3) states and cities have been meeting ongoing operating expenses by peddling one-time asset sales; and (4) the federal government, which now provides almost 30% of what states spend annually, “is facing understandable pressure to rein in spending and reduce deficits.”
These things are true, they are widely known to be true, and state-local governments are grappling with them, however fitfully and incompetently. Unfortunately, Ravitch obscures one other very important reason to worry about state-local finances — the fiscal Ponzi scheme of infrastructure investment.
“We are drastically underinvesting in physical infrastructure — roads, bridges, ports, etc. — the necessary underpinning of future growth,” he writes. Thus, in his reckoning, the fiscal crisis is responsible for a looming infrastructure crisis. In point of fact, the problem is the reverse: Excess spending on infrastructure has contributed to the fiscal crisis. The problem is that this over-spending is not widely acknowledged, hence, is not being dealt with.
Interestingly, Ravitch suggests that the federal government, which controls 30% of state-local purse strings, should use its influence to encourage more responsible behavior: “The federal government could condition its continued financial support on states and local governments adopting budget systems that would require recurring expenses to be matched by current revenues.”
That last statement is hilarious on many levels, not the least of which is that the federal government is the last entity on the planet that should be lecturing anyone about matching revenues and expenses. Only slightly less guffaw-inducing is the fact that it is the federal government that has impelled state and local governments to increase spending by dangling the promise of federal funds on the condition that those funds be matched by local dollars — Medicaid is a classic example. For many programs, unlike Medicaid, federal support is temporary, lasting just long enough to build up vocal constituencies and making them almost impossible to dismantle.
Nowhere has this tactic been applied more consistently than in infrastructure spending. The Feds encourage states and localities to build new roads, mass transit facilities, ports, airports, etc. by defraying the up-front capital costs. But local governments and authorities are left with the responsibility to cover ongoing operating shortfalls and, a life-cycle later, to find the money to rebuild or replace the facility. Uncle Sam doesn’t do maintenance. Meanwhile, the state-level accounting for major transportation projects — both highways and mass transit — is so useless that it is impossible for taxpayers and voters to know if any given project augments or diminishes the nation’s net wealth. One can argue that we are maintaining considerable infrastructure — farm roads in rural areas that no longer support farms, for instance — that should have been retired long ago.
So, yes, Ravitch’s big-picture message is well taken. As the headline to his piece says, “More Detroits are on the way.” The crisis is deepening. What’s missing is an understanding that the federal government is a major contributor to the problem. States don’t need the feds to tell us what to do. We need them to back off, tend to its own looming fiscal disaster and stop stimulating the growth of state-local government spending that cannot possibly be sustained over the long run.There are currently no comments highlighted.