Budget Bait-and-Switch Needs to End

By Bob Williams and Amber Gunn

States are in trouble -- big time. Their trouble is our trouble, since taxpayers are the ones left to clean up the remnants of the ruin they'll leave behind.

A recent report by the National Governors Association estimates that states will face budget deficits totaling $134 billion over the next three years. Vermont Gov. Jim Douglas believes the worst is probably yet to come.

Most governors and state legislators are using accounting gimmicks and federal stimulus funds to temporarily balance their budgets. When federal funds run out in a year or two, these states will face a spending cliff, necessitating a significant downsizing of their state budgets.

Yet while politicians de-emphasize their long-term financial problems, they hype up their short-term deficit estimates in hopes of shoring up more public support for tax hikes to patch the gaps left behind by disappearing federal stimulus dollars.

Legislators of both parties allow bureaucrats to report a budget shortfall as the difference between the preferred level of spending vs. the revenue forecast. A real shortfall is the difference between the current level of spending and the revenue forecast. Thus, most shortfalls are highly inflated, while long-term unfunded liabilities are highly ignored.

The day of fiscal reckoning is coming. Legislators need an urgent wake-up call before it's too late. Various state economies can't afford such inflated levels of spending.

State revenue isn't expected to return to 2007 levels for several years or more. Most legislators are truly unaware of the severity of the structural budget problem and those who are refuse to address it.

A close examination of state finances reveals that nearly all states have enacted budgets that are unsustainable. Rather than fundamentally reforming the size and scope of state government by reducing spending to reflect declining state revenue, most states are relying on accounting gimmicks, one-time funds and federal stimulus money to "balance" their budgets, thus artificially propping up a higher level of spending than can be supported by their state's economy.

The problem is excessive state spending, not a lack of revenue. It is true that states have faced declining revenue in the past two years, but the recent decreases pale in comparison with the steep revenue increases most states have experienced since 1993. According to the U.S Census, state revenue data since 1993 show a total taxation increase of 120.8%, or 2.5 times inflation.

Washington state is a perfect example of the bad choices legislators are making. Last year, Gov. Chris Gregoire and legislative leaders convinced the public that the state was facing a $9 billion shortfall out of a $30 billion two-year general fund budget. Talk of "budget cuts" ran thick. But when they finished the 2009-11 budget, legislators had increased total spending by $1.3 billion.

This year, another $2.8 billion deficit emerged -- predictable, given that the budget problem wasn't "solved" but exacerbated. Again the tough budget cut talk began. Tears were shed. Dramatic speeches were made. Yet the final proposals looked like this: The Senate-proposed budgets actually

raised

total spending by $2.95 billion and the House-proposed budgets raised spending by $2.7 billion. The reduction of hoped-for spending increases was again deliberately mislabeled "cuts."

During the current economic downturn, Washington state seems to have fine-tuned the games and gimmicks used to "balance" its budget, resulting in costs being passed on to future generations. Given all the deferred costs, unfunded pensions, retiree health care expenses and increased debt service, the money to continue current spending levels just plain doesn't exist. Something will have to give.

Washington isn't alone in its gamesmanship. Various other states are attempting to push problems onto future generations by deliberately delaying pension contributions, ignoring actuarial recommendations regarding longer life spans for retirees and assuming an unreasonable rate of return on state investments. The majority of states have experienced double-digit pension losses in the last two years. Some states, like Washington, lost up to a quarter of their investments, with no plan to make up the losses.

Legislators need to look at the costs that are being pushed forward and ask themselves, "Where are we going to get the money?" Even the National Governors Association recognizes the need to "right-size government." The association released a report in February -- "The Big Reset" -- which makes it clear that the long climb toward fiscal recovery hasn't even begun.

It is time for states to implement reality-based budgeting, which acknowledges that states must live within their means, just like us, and prioritize spending based on proven results. This model worked in 2003 when Washington's Democratic Gov. Gary Locke worked with legislators to close a $2.8 billion budget deficit without tax increases.

Citizens shouldn't need to plead with legislators to stop the budget gimmicks and downsize government. This is common sense. We just don't have the money to pay for everything politicians are promising. It is time for "The Big Reset."

Bob Williams is the founder and senior fellow of the Evergreen Freedom Foundation, a public policy organization in Olympia, Wash., dedicated to the advancement of individual liberty.

Amber Gunn is director of economic policy for the Evergreen Freedom Foundation.