Many States' Budgets Designed to Hide Their Problems, Warns Volcker

NEW YORK (The Deal) -- The state of New Jersey's financial blunders, heralded by an avalanche of nine credit rating downgrades since 2010, have called into question its ability to support its troubled municipalities such as Atlantic City, and New Jersey is far from alone in its budgetary troubles.

Former Federal Reserve Chairman Paul Volcker expressed deep concern about states' tendencies to budget "so as to disguise the nature of the problem" and hide the fact that many states have "deep-seated problems that they're not owning up to" at a state finance discussion Monday hosted by the Volcker Alliance, the nonprofit he founded in 2013.

Richard Ravitch, a former lieutenant governor of New York, warned at the symposium that that these state budgeting trends will cause more municipal distress going forward, because "fiscal stress rolls downhill."

Ravitch noted that more and more municipalities are looking, "if they're entitled, to take advantage of their protections under the federal bankruptcy law."

One problem is that states are increasingly passing on costs to municipalities such as counties and cities. William Glasgall, a former managing editor at Bloomberg News who joined the Volcker Alliance last year, explained, "As state financing costs contract, states are pushing a lot of costs down onto cities and counties."

At the same time, many states leave little financial flexibility in their budgets, which limits their ability to help their troubled municipalities. Glasgall named Scranton, Pa., and Atlantic City as examples of distressed municipalities.

On Monday, the Volcker Alliance released a report focusing on three states' budgeting practices, highlighting the good, the improving, and the ugly: Virginia, California, and New Jersey, respectively. When it comes to budgeting, many states suffer from an "addiction to one-shots and gimmicks," Glasgall griped.

Virginia's budget, on the other hand, tends to be "conservatively managed, with a lowercase 'c'," he explained. The Volcker Alliance noted that only eight states maintain the highest credit rating from all three major ratings agencies, and Virginia is on that elite list.

Virginia is forward-looking in its budgeting, legally requiring six-year forecasts based on a consensus from multiple agencies. Budget and finance officials often stay in office as governors come and go, which tends to limit governors' influence on the budgeting process, the report said.

Virginia also puts statutory limits on its borrowing, which constrains its ability to utilize debt-backed gambits.

Still, even Virginia is struggling in the aftermath of the credit crisis. The Volcker Alliance's report noted that Virginia has fallen short of its revenue goals ever since the recession, and resorted in 2014-2016 to taking money out of its rainy day fund to fill a budget gap.

Slow reactions to federal spending cuts related to budget sequestration have hit Virginia's defense-heavy economy hard, and the resulting state revenue declines "threaten to drain much of Virginia's rainy day fund," the report warned.

If that sounds bad, New Jersey is in even worse shape. The Volcker Alliance report includes a long list of the Garden State's fiscal sins.

New Jersey may prohibit using bond financing to fill out its budget, but the state has turned to other forms of borrowing to balance its budget.

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