On a year-to-year basis, a state’s budgetary health depends a great deal on the strength of its economy. Today the national economic downturn brings mostly bad news—with states collectively facing huge deficits in their current budgets. But even boom times can't protect states from some of the long-term challenges they face.
With the population and infrastructure aging—and with an enormous number of public employees approaching retirement—states face a huge number of bills that will drain their coffers, reduce their flexibility to fund needed investments and likely require unpopular service cutbacks.
Meanwhile, the relative size of states' general funds—the most significant repository for discretionary revenue—has been steadily shrinking. Between 2000 and 2007, the average general fund contracted from 48 percent of total funds to 44.7 percent.
And all this is going on while states have to confront many big issues for the first time, including:
• Pension Benefits. Having dedicated nearly $2 trillion for pension benefits across the states, most state pension plans do a good job of setting aside money. Even so, about 15 percent, or about $360 billion, of state pension benefits remain unfunded.
• Other Retiree Benefits. States are not setting aside money to cover the costs of looming non-pension benefits, such as retiree health care. Only 5 percent of the required funds have been set aside for this purpose, leaving a gap of about $370 billion.
• Prisons. The projected increase in the prison population could raise incarceration costs by as much as $27.5 billion.
• Infrastructure. Most state infrastructure maintenance procedures are rated inadequate—the American Society of Civil Engineers’ estimates $1.6 trillion is needed to make the nation’s infrastructure adequate.
• Interest on Debt. As states borrow more and more funds, the interest needed to service that debt is accumulating.
The fact that states are unprepared to pay these bills won’t stop the bills from coming. And when they do come due, states will be faced with some tough choices. Do they cut existing programs and services? Raise taxes? Not pay the pension and health benefits promised to retirees? Let the infrastructure deteriorate even more?
These econimic realities will shape state financing for the next decade. How big will the bills be in your state?
