Penn’s Fels Institute, Harvard University and AEF Produce ‘State of the States’ Report

PHILADELPHIA- The States Project, a joint venture of the Fels Institute of Government at the University of Pennsylvania, Harvard University’s Institute of Politics and the American Education Foundation, has issued a new report showing that state and local governments are carrying more than $7 trillion in debt. 

The new “State of the States” report also offers nonpartisan analysis on the FY 2011 finances and budgets of Massachusetts, New Jersey, New York and Pennsylvania.  The report shows that an end to the federal fiscal stimulus is causing states to close widening budget gaps by cutting funding in education, infrastructure and other key programmatic areas.

The report aims to stimulate conversation about the fiscal challenges of state governments at a time when they are struggling with budget deficits, falling tax revenues and strapped social programs.  Based on The Annual Report of the USA, a publication of the Harvard Political Review, the state reports offer reliable, clear, straightforward examinations of budgets, public policy and the overall fiscal health of each state.  Analysis addresses overall economic trends, including unemployment rates, pension-program finances and educational budgets and offers a context for understanding how public policy affects all citizens.  

“Total state and local debt is now almost half of what the national debt is, but nobody talks about that,” said senior editor Alex Palmer.

The key report findings include:

• State and local governments are carrying more than $7 trillion in debt.  More than half of that debt is not reported in the official financial statements produced by state and local governments.

• Federal fiscal stimulus to states has ended. As a result, states have faced budget gaps totaling $55 billion in FY 2013. States are closing those gaps by cutting spending, largely for K-12 education, higher education and infrastructure, rather than raising revenues.
• Twenty percent of Americans are on Medicaid. Medicaid has been the largest category of state spending for the last three years, and its growth is outpacing inflation, largely due to the effects of the recession.
• Medicaid is “crowding out” spending on other state priorities. As a percentage of state expenditures, total K-12 education spending has dropped 2 percent since FY 2008 while spending on Medicaid has increased 2 percent. Total spending on infrastructure is down 20 percent since FY 2009.
• As measured by independent economists, state pension plans carry roughly $2.5 trillion in liabilities; health-care benefits carry more than $600 billion. None of these liabilities is reported in state financial statements.
• States often manipulate their accounting rules to show a balanced budget, when a deficit exists. States can delay payments into future years (like tax refunds, or pension contributions), raise debt to cover the deficits (moving that debt off books using component units like transit authorities) and borrow from state funds meant for other uses (such as funds meant for infrastructure or environmental protection).
• The “fiscal cliff” is coming on Jan. 1, meaning that the federal government will have to find trillions in cuts during the next 10 years.  While grants to states make up only 16 percent of the federal budget, they make up 40 percent of the discretionary portion of the budget. State block grants will be a prime target for national budget cuts and states may pass federal reductions down to cities, the most vulnerable level of government, which rely on state block grants for 34 percent of their revenues.