Two Takeaways from Federal Report on State Finances

May 3, 2013

GOVT WATCHDOG: State and local expenditures on Medicaid and health-care for government employees and retirees are projected to grow

WASHINGTON — The Government Accountability Office released a report on the condition of local and state finances Monday. It did not contain any revelations or groundbreaking news, but will nonetheless pique the interest of those who follow Colorado politics.

The 15-page document provides insight into the recent past, present, and future of local government’s coffers.  Here are The Colorado Observer’s top two takeaways:

State coffers have returned to their pre-recession levels

When good news undercuts their plans, politicians like to often dismiss or downplay the news, and this report is no exception.

At a budget-signing ceremony Monday, Governor John Hickenlooper dismissed the surge in state coffers, saying it was lower than five years ago and not indicative of any broader trend.

“Looking ahead, expected revenue is 12.6 percent or almost $1 billion lower when adjusted for population and inflation since FY ’07-’08. Some of our recent recovery in revenue is one-time in nature,” said Hickenlooper.

Not quite; the GAO report shows that far from being a one-time only deal, state sales and income tax revenues have returned to their pre-Great Recession levels.

“In the near term, the state and local government sectors have seen an increase in tax receipts following the decline during 2008 and into ’09,” according to the non-partisan watchdog. “Specifically, from the second quarter of ’09 to the third quarter of ’12, total tax receipts, increased more than 12 percent in nominal dollars, returning to early pre-Great Recession levels from early 2008. Income and sales taxes accounted for most of the gains, increasing more than 22 percent and 14 percent in nominal tax dollars, respectively, during the same period.”

The budget problem is more like a one-legged than a three-legged stool

Politicians like to use concrete images and low numbers to describe complex ideas. Think of Republicans who describe the GOP as a three-legged stool that consists of economic, foreign-policy, and social conservatives.

Sen. Mark Udall too has gotten into the act.

In an April 25 press release, Udall weighed in against the sequester — the round of automatic, across-the-board cuts in the growth of government spending that began this year and is scheduled to continue until 2021.

Udall said that as a member of the Senate Armed Services Committee, he considered the sequestration cuts to defense as not only unfair but also misguided.

“Historically low revenue, unsustainably high spending and growth in Medicare and Medicaid costs threaten our economic health and global competition. It’s a three-legged stool that needs to repair, but those that refuse to address the sequester are suggesting that we just chop away at one of the legs,” Udall said.

Udall’s suggestion that sequestration does not affect Medicare and Medicare spending is on point. Yet as a description of the federal budget problem, his statement is misguided. As the Obama administration’s own figures show, federal revenue this fiscal year is expected to surpass the previous high in 2007, rising to 2.7 trillion from 2.56 trillion.

In addition, Udall’s statement does not reflect the reality of state and local finances: A lack of revenue is not the main problem. Skyrocketing Medicaid, pension costs and other mandatory spending liabilities are.

As the GAO document concludes, “The primary driver of financial challenges for state and local government sectors in the long term continues to be the projected growth in health-related costs. Specifically, state and local expenditures on Medicaid and the cost of health-care compensation for state and local government employees and retirees are projected to grow more than GDP.”

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