Name: Why 27 U.S. States Are Going Broke
Uploaded: 2024-11-06T06:27:14.000Z
Duration: 11 min 36 s
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State governments in the U.S. are running out of cash.

Adverbs of degree

After meeting our obligations, we have very little money left.

One count suggests that 27 states lack the necessary funds to pay their bills.

The problem is most prominent in states like Connecticut, New Jersey, and Illinois.

Not only the city of Chicago, but the state of Illinois is running straight into a brick wall in terms of its finances.

City of Chicago is facing a billion dollar deficit.

State's facing a massive deficit while also needing to bail out things like the Chicago Transit Authority.

Chicago Public Schools is asking for a bailout.

States received about $800 billion from the federal government to kick off the decade.

That spending obscured long-running issues.

What we're seeing is largely a return to earth from those pandemic surpluses.

You know, we saw a big increase in income taxes.

It was really like a bit of an economic boom.

States now are working with tighter budgets as the country's population and infrastructure ages.

Even economically powerful states see trouble ahead.

To the degree that the states are relying on federal aid, it becomes a daisy chain of vulnerability.

State governments account for 15% of the nation's economic output.

And they employ 13% of the U.S. workforce.

So why are so many state governments going broke?

And what can they do to repair their finances?

State governments pay for much of the nation's systems of education, healthcare, transportation, and public housing.

But they received tremendous amounts of help from the federal government to do that.

In 2022, federal grants covered 38% of total spending from state governments.

During the pandemic, we saw a lot of one-time revenue, a lot of one-time expenditures that kind of had the effect of obscuring these long-term challenges that states faced.

The ensuing economic boom strengthened state coffers and increased revenues.

The increase in revenue helped state leaders lower taxes and increase spending.

We, you, all of us together, delivered both the largest tax cut ever by a huge margin and the largest increase in teacher salaries in our state's history.

We understand that that's, you know, something that is politically palatable, particularly in the time of an election.

It is something that if those receipts decline, we may see some future imbalances between, you know, expenditures and revenues that states will have to correct.

In some cases, this is a very intentional plan for states to, you know, spend down these unexpectedly high revenues.

On the other side, this could really reflect, you know, tightening budget conditions and states needing to draw on those dollars to help make ends meet right now.

But the federal funds given to states will run out in 2026, as a cost-of-living crisis hits many parts of the country.

For too many, the cost of living is too high.

The higher cost of living is making some state leaders consider tax relief.

That includes places like Wyoming and North Dakota.

States that do well are North Dakota, Idaho, South Dakota.

And what these states really have in common is that they have a relatively limited fiscal footprint.

Many policymakers across the states, they did pretty well managing the pandemic era budget surpluses.

A huge looming question out there is around the long-term affordability of the tax cuts and spending increases that were enacted.

State governments also have to manage long-running financial liabilities.

There are states like Illinois, Connecticut and New Jersey.

While these states really have accumulated a lot of debt after the great financial crisis, the main reason for their weak fiscal stance is the pension obligation.

Roughly 86 percent of public employees receive pensions.

These are retirement plans that provide guaranteed income for life.

States and cities, in order to attract public servants, maybe paying them less money than they would make in the private sector, provide generous pensions.

If pension liabilities are fully accounted for, as many as 27 states lack the money needed to pay their bills.

What goes a little bit under the radar is that pension liabilities are an extremely expensive form of debt.

The portion of the pension that is unfunded increases by 7 percent every single year.

This debt leaves states with less money to fund public programs.

So we're talking hospitals, we're talking about roads, we're talking about schools.

Take Illinois, for example, which owes money to former employees, but has less than half of the funds raised to pay them back.

We've seen analysis from JP Morgan that says in order to actually fund these enormously generous promises that were made decades ago, you would have to double the state income tax overnight in Illinois.

Pritzker has steadily kept spending on areas like roads in addition to education.

Penny by penny, we are still working together, saving important things for our state.

This requires tax increases to balance the budget.

But that option may not be available to a state like Illinois, which already has relatively high tax rates.

Using taxes to raise additional revenue is limited.

Higher taxes tend to make people move, especially top earners.

That's according to studies on states like California.

When the marginal tax rate increases by 3 percent, California loses about 0.8 percent in the tax base in the top income bracket.

That's actually substantial because it's like 1 percent of the tax base in the very high bracket, which for the most part accounts for the majority of tax revenues overall.

Moving forward, state governments must respond to emerging risks like more extreme weather, an aging population, and migration.

Migration, I believe, is going to be one of the biggest issues that will face the country.

In the 2020s, many Americans moved from high tax areas into states like Florida, Texas and North Carolina.

Coincidentally, those states that have those low income taxes, of course, they are attractive because of the climate, but they also have a high degree of climate risk.

That's where it gets, it's going to be a real test for politicians in terms of managing the state budget.

Florida, for example, has drawn many people with its lack of state income taxes and business-friendly policies, but it sees risks ahead.

Florida is being challenged by a few factors that may be outside of policymakers' control.

Within Florida's long-term budget assessment, they actually highlight Medicaid as a growing fiscal concern for the state.

And of course, climate change and hurricanes hitting the state of Florida is a real concern.

The federal government generally handles over 75% of disaster-related costs.

Agencies like the Federal Emergency Management Authority, or FEMA, could quickly run out their budgets and require further funds from Congress.

I think anyone that's relying on FEMA to be leading the response, that is not the way proper storm response is.

There's a great concern of what that future risk is to the federal government, and that it's a big number that's being presented to the taxpayer, ultimately.

Nearly all counties in the United States are exposed to some sort of climate hazard.

I don't think people always associate a rising number of heat days with climate.

I think the Midwest, being exposed to extreme heat, it can compound other hazards, which can be particularly impactful to agriculture.

Crop production in the Midwest does contribute to that gross state product.

You know, we've seen a lot of food inflation over the last couple of years.

Right now, the market isn't pricing in climate risks into securities, into municipal bonds.

And so this becomes a future potential bill for state and local governments.

Even in North Carolina, where Helene went up and disaster struck, could anyone have really anticipated that?

You need to check on your health of your infrastructure, and can it withstand a severe stress test?

The largest banks have to do stress tests coming out of the Great Recession.

There's a similar concept that states actually do.

At least 20 states review their financial strength by conducting stress tests or long-term budget assessments.

And all 50 are developing rainy day funds.

These savings are used during economic downturns.

Some states, like New Jersey, Montana, and Illinois, have very low savings in these funds.

Other states, like Wyoming and Alaska, could finance their operations for months.

Alaska, a very resource-rich state, a lot of its tax revenue is derived from oil prices and what's called severance taxes on net energy production.

It really is a double-edged sword for a state like Alaska, as well as other states like North Dakota and Wyoming.

This dependence on oil prices and on those severance taxes has really become unsustainable.

The point of optimism is that we're seeing more and more states do their assessment, do their homework, right, to understand whether they are on a fiscally sustainable trajectory these days.

For example, the state of Maryland found budget gaps in its long-term assessment conducted in 2022.