One of the great charades of American public finance is that “states must balance their budgets.” I have been hearing this since I entered the business many years ago. In fact, it was a common mantra of national Republican leaders who often said “the federal government should be like the states who must balance their budgets.” Except, it’s not true. In fact, it’s nauseatingly untrue. Total state government debt is about $4.17 trillion. And it is a result of the people of this country wanting more government than they are willing to pay for. But the real shame is on the political leadership who acquiesce to those wants.
Forty-nine states have statutory or constitutional balanced budget requirements. But those good government limitations only cover operating budgets. And operating budgets are somehow only 60 percent of total state spending. States can borrow money for capital projects. Heck, in many states they can borrow money for operating expenses as long as they call them capital projects. States can also do things like underfund pension plans, which most do. There is much game playing and budget gimmickry at work.
The Pew Center on the States has done great work on the state pension issue. Pew found that 34 states significantly underfunded pension plans by $1.38 trillion. Maybe we should talk to state legislators like they are five years old and explain that the money will eventually have to be paid. Of course, it is going to have to be paid by people who are five years old today. The failure to fund pensions is a cowardly omission on the part of political leaders.
The Tax Foundation has also done great work highlighting the debt owed in the states. The Foundation recently released its per capita debt by state chart. Massachusetts is number one with every man, woman, and child owing $11,309. Tennessee is last with every person owing just $925.
You can challenge the myth that the states must balance their budgets. They don’t. There may be good reasons to incur debt to pay for some state government projects. We should at least be honest about it.
Tax Analysts Blog
The Myth of State Balanced Budgets
Posted on Jun 12, 2013