Paul Volcker, Richard Ravitch Say State Budget Crisis Threatens 'Social Order'

WASHINGTON -- State finances are teetering with $4 trillion in unfunded liabilities to cover pensions and health care for state workers, along with revenue shortfalls, antiquated financial practices and skyrocketing Medicaid costs, according to a report released Tuesday.

The State Budget Crisis Task Force -- organized by former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch (D) -- is the first complete study of the state finances conducted without the involvement of state government groups. Volcker and Ravitch concluded that the dire financial portrait may lead to major cuts for social services, causing a cascade of further problems for state and local governments nationwide.

"The thing that worries me is the threats to the social order," Ravitch told The Huffington Post, noting that "cultural and social bankruptcy precede financial bankruptcy." "You can't cut human services and cut the ability of government to take care of the people."

State governments have been borrowing to pay for operating expenses in order to comply with state constitutional mandates for balanced budgets, the report said. Those loans and the practice of shifting spending between budget categories make balanced budgets "illusory," the report said. In addition, Volcker and Ravitch noted that "one-shot" financial measures are common in state governments, including those that pile up debt for the future. State revenue projections also can be wrong, because of weak planning, lack of transparency and miscalculation, the report said.

The report studied six states -- California, Illinois, New Jersey, New York, Texas and Virginia -- picked because of their large populations.

Volcker and Ravitch said that unfunded state government pension obligations could total as much as $3 trillion, triple the $1 trillion estimate produced by the states. This is in addition to the $1 trillion in unfunded health care obligations for retired state employees. The report also notes the rising Medicaid costs, a common refrain from governors and state legislators nationally.

With a debate nationally over state adoption of the now optional Medicaid expansion mandated under the Affordable Care Act, Ravitch said he does not believe the plan will reduce state Medicaid costs short-term. The expansion is funded by the federal government for three years. States kick in 10 percent of the costs after that. Ravitch said a complete overhaul of the system will be needed, addressing the costs placed on Medicaid by not completely funding the Medicare system and the increase in Medicare users due to the aging population.

The new report's alarm about rising Medicaid and pension costs is similar to the "Fiscal Survey of the States"released last month by the National Governors Association and the National Association of State Budget Officers. But the Volcker and Ravitch report does not share the earlier fiscal survey's optimistic outlook.

"Those organizations are controlled by elected officials," Ravitch said. "They are not independent."

Much of the impact of state budget woes has been felt by local governments, which have lost state funding and are subject to property tax burdens that have led to cuts in local services that include police, fire, public works, education and social services, Ravitch said. He noted these cuts will have a long-term impact on public safety and the economy.

States are prohibited from declaring bankruptcy, but local governments can. Ravitch said municipal bankruptcies could become more common, leading to even more cuts.

The report outlines ways to improve state finances, including several that are similar to a 2010 report Ravitch wrote while New York lieutenant governor on his state. Ravitch's New York report was rejected by then-Gov. David Paterson (D) and legislative leaders. Ravitch is credited with rescuing the New York's Urban Development Corp. and Metropolitan Transportation Authority from bankruptcy.

Among the new report's recommendations is for states to end cash-based budgeting, replacing it with budgets that allow for transparency in how revenues match obligations in the same fiscal year. Ravitch said this would curb "one-shot" budget plugs. In addition, states should issue four-year fiscal plans and make state financial information accessible.

Volcker and Ravitch recommended that states spend more of their rainy day funds. State pension funds, they said, should disclose shortfalls. State taxes should be reformed and states should collect sales tax on their citizens' Internet purchases, the report said.

Ravitch and Volcker also recommended that federal and state officials work together on Medicaid and health care costs. States, the report said, should carefully monitor the financial health of local governments and address infrastructure maintenance.

Ravitch said state and federal leaders need to address the issues immediately.

"It is getting worse every day," Ravitch said. "We have to stop bullsh---ing."