Study: US states face funding challenges, need to reform budgeting practices

WASHINGTON – U.S. state governments face persistent financial challenges even as the improving economy has boosted tax revenue, a study says, highlighting the need for most states to reform their budgeting practices.

State budgets are being squeezed by rising pension and health care costs, federal spending cuts and overdue repairs and improvements to roads and bridges, according to a report released Tuesday by the State Budget Crisis Task Force. The non-profit was formed three years ago and is co-chaired by former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch.

The study recommends several steps: State governments should adopt more transparent budgeting practices; implement multiyear financial plans; beef up their oversight of local government budgets; and rebuild their reserve or “rainy day” funds.

Higher pension and medical costs are crowding out other spending, the report said. State funding for pre-kindergarten programs in 2012 fell to the lowest level in 10 years, when adjusted for inflation.

“The ability of state … governments to meet their obligations to public employees, to creditors, and, most critically, to the education and well-being of the public is deteriorating,” the study said.

Taxe revenue isn’t increasing quickly enough to resolve all the states’ financial problems, the report said. States’ biggest challenges are long term, such as rising pension costs, rather than short-term issues stemming from the recession. Yet states are avoiding needed structural reforms and instead are relying on a “misguided and widely held belief” that they can “grow out of their financial problems,” the task force said.

The task force also recommended that the federal government do more to track the impact of its spending cuts on state and local government finances. For example, proposals in Congress to boost the Medicare eligibility age from 65 to 67 would require states to cover their employees and retirees for two additional years, imposing significant costs.