State Budget Crises and Responsible Contracting

The Anti-Government SpiralNegative attitudes toward government• Promoted deliberately by anti-government conservatives• Reinforced by political candidates and elected officials as they criticize their opponents•Inadvertently repeated by non-profits leaders and advocates, esp those who want govt to do better

Growing anti-tax sentiment

Cuts in public services and staff

Quality of governance declines

The Anti-Government SpiralNegative attitudes toward government• Promoted deliberately by conservative• Reinforced by political candidates and elected officials as they criticize their opponents•Inadvertently repeated by non-profits leaders and advocates, esp those who want govt to do better

Growing anti-tax sentiment

Cuts in public services and staff

Quality of governance declines

1. Make the case for government

Dramatic Decline in State Economic Circumstances

Less than 9%

9.1% to 10%

More than 10%

National Unemployment Over 10%Real unemployment rate could be 18%

Source: Bureau of Labor Statistics, November 2009

Projected FY2010 Budget Gaps

More than 30%

10 to 30%

Less than 10% Source: Center on Budget and Policy Priorities, November 2009.

A Confused and Angry Public

Public Opinion• The public confuses the $787 billion for ARRA with

the bank bailout ($700 billion TARP) and the auto bailout & doesn’t understand how ARRA was structured

• Majority of likely voters believe recession is not over; Lack of jobs is biggest problem the country is facing; Obama Administration needs to do more

• A well-funded effort to create a crisis about the federal budget deficit is bearing fruit (Peterson Institute)

Our story• De-regulation, lack of

enforcement, and risk-taking by financial institutions caused the recession

• Government can pave the way for economic recovery – especially for the middle class - with investments in public structures

• The public structures we’ve built over the last 80 years can’t be maintained without investments

Their story• Irresponsible borrowers,

programs for the poor, and incompetent government officials caused the recession

• The wealthy create jobs; the government only gets in the way of economic actors

• The states are facing fiscal crises because they have tried to do too much; cutting state spending is the solution to the state fiscal crisis

The Banks Crashed the Economy• The banks – especially the big banks who received TARP

money - brought down the economy by creating , marketing, and gambling on riskier and riskier financial products – with borrowed money

• When the bubble they created burst,– $15 trillion in personal wealth and gone – $6.1 trillion in housing value disappeared– Pension funds (the top 1000) dropped a trillion dollars in value– 8 million jobs have been lost since the recession began– Unemployment is over 10% – One in nine Americans – 34 million – are on Food Stamps– 39.8 million people in poverty - highest number since 1960

The Economic Collapse Crashed State Budgets• State budgets are suffering because revenue comes from:

– Property taxes (property values declined 20-30%)– Sales taxes (depressed)– Income taxes (millions unemployed and wages cut)– Corporate taxes (businesses are contracting)

• But needs grow in an economic downturn:– Unemployment Insurance (paid for through state payroll taxes, a

declining base; states had been raiding rainy day fund)– Medicaid and uninsured healthcare costs (numbers grow with

unemployment)– Transportation and infrastructure repairs and maintenance (put off for

years, engineers now say basic repairs are URGENT)– States pay for k-12 and public university education costs (competing in

new economy requires ever higher levels of literacy and reasoning)

The Recovery Act provided $787 billion for:

• $288 B (37%) in tax breaks to individuals and business• $154 B (19%) for infrastructure, energy, science• $144 B (18%) in state fiscal relief • $112 B (15%) for healthcare, education & training • $81 B (10%) on support for low income households

• 1-1.5 million jobs have been saved or created with $220 B of the stimulus that has been spent

• But only a minority of likely voters believe the stimulus has had a significant impact on the economy

Source: Economic Policy Institute

Looming State Budget Crises

• State and local budget shortfalls– FY 2009 $104 B (Recovery $31 B)– FY 2010 $217 (Recovery $68 B)– FY 2011 $220 (Recovery $38 B)– FY2012 $140 B (Recovery $2 B)

• Slashing support for public structures will undermine a state’s ability to grow its economy and the ability of its citizens to compete in the economy of the future – “eating the seed corn”

Source: Economic Policy Institute

Federal versus State Role in Social Spending

0

500

1000

1500

2000

2500

3000

Federal: $1,932.5 State: $1,056.1

All Else Safety Net Healthcare

Social Security Corrections Transportation

Education

in billions

Federal versus State Role in Discretionary Social Spending

0

500

1000

1500

2000

2500

3000

Federal: $990.3 State: $1,056.1

All Else Safety Net Healthcare

Corrections Transportation Education

in billions

Federal versus State Control over Social Spending

0

500

1000

1500

2000

2500

3000

Federal: $563.6 State: $1,482.7

All Else Safety Net Healthcare

Corrections Transportation Education

in billions

State and local governments provide/pay for:• Public education -all children from kindergarten through high

school; subsidies to public universities• Police, fire, emergency services• Parks, playgrounds, and recreational areas• Protection of clean water and air; sewers, trash removal• Prisons and jails• The maintenance of roads and bridges• Courts and the judiciary• Subsidies to healthcare providers• Care for the handicapped and long-term care for the destitute

elderly• A myriad of other public services and public structures

STATE GOVERNMENT

The Federal govt has provided more support to the financial institutions that crashed the economy than states dealing with the economic devastation:• TARP (Troubled Assets Relief Program) provided $700 billion in

direct loans to banks with “toxic assets”• The Federal Reserve (our central bank) provided TARP banks

with another $4 TRILLION in guarantees to help shore up the banks – even though the banks have not started loaning money to small businesses or modifying family mortgages to keep people in their homes

• The Federal Reserve guaranteed the banks’ bets by bailing out AIG

• The Federal Reserve continues to lend money to the banks who crashed the system at very low interest rates – which they are using to give bonuses and finance big merger deals

The fiscal crisis facing state governments is the worst in our nation’s history

• States have never faced such a large and swift fall in resources

• Huge cuts in state spending will make the recession deeper, longer, and undermine the fragile success of early stimulus funding

• Traditional ways that state raise funds - issuing bonds and borrowing from private banks - will reward the institutions and individuals who created the crisis

Projected FY2010 Budget Gaps

More than 30%

10 to 30%

Less than 10% Source: Center on Budget and Policy Priorities, November 2009.

Instead• The Federal government should provide more $200-

$300 billion in direct aid/fiscal relief to states and

• The Federal government should take over responsibility for funding Medicaid

and• State governments should be able to borrow from the

Federal Reserve directly at the same rates as the private banks, cutting out the bank fees and profits and giving states access to capital for critical public investments