Iris Lav Testifies on State Budgets, Debt, and Practical Solutions

Senior Analyst Iris Lav testified today before a House Oversight subcommittee on the large budget gaps that states face, misconceptions about long-term issues like pensions and debt, and what states should do to address their various financial challenges.

On differences between the short- and long-term challenges that states face, Lav testified:

“As states release their proposed budgets, we find that nearly all states are proposing to spend less money than they spent in 2008 (after inflation), even though the cost of providing services will be higher. Most state spending goes toward education and health care, and in the 2012 budget year, there will be more children in public schools, more students enrolled in public colleges and universities, and more Medicaid enrollees in 2012 than there were in 2008...

“Unlike the projected operating deficits for fiscal year 2012, which require near-term solutions to meet states’ and localities’ balanced-budget requirements, longer-term issues related to bond indebtedness, pension obligations, and retiree health insurance...can be addressed over the next several decades.  It is not appropriate to add these longer-term costs to projected operating deficits.  Nor should the size and implications of these longer-term costs be exaggerated, as some recent discussions have done.  Such mistakes can lead to inappropriate policy prescriptions.”

And, on proposals to let states declare bankruptcy, she said:

“States have adequate tools and means to meet their obligations.  The potential for bankruptcy would just increase the political difficulty of using these other tools to balance their budgets, delaying the enactment of appropriate solutions.  In addition, it could push up the cost of borrowing for all states, undermining efforts to invest in infrastructure.”

You can read the full testimony here.