The budget shortfalls, plunging revenue, and economic woes plaguing near-broke California could foretell the future of other cash-strapped states.
A new study by The Pew Center on the States found that the economic pressures that pushed California to the brink of a total economic meltdown are also found in nine other states across the country, all of which could face a financial disaster just like the one in the Golden State.
Those states with economic conditions most like California’s include Oregon, Nevada, Arizona, Wisconsin, Illinois, Michigan, Florida, New Jersey and Rhode Island. What do they all have in common? Major drops in revenue, growing budget gaps, increasing unemployment, high foreclosure rates, a supermajority requirement for state legislatures to pass budget bills (which includes making budget cuts or raising taxes), and similar troubles managing long-term fiscal matters and budgetary processes.
Spiraling toward a California-style economic crisis isn’t a destiny these states want. According to The Pew Center on the States:
These states’ budget troubles can have dramatic consequences for their residents: higher taxes, layoffs or furloughs of state workers, longer waits for public services, more crowded classrooms, higher college tuition and less support for the poor or unemployed.
While these economic conditions aren’t good for the states, they’re not good for the country, either. According to The Pew Center:
The 10 states account for more than a third of America’s population and economic output. And actions taken by state governments to balance their budgets—such as tax increases and drastic spending cuts—can slow down the nation’s economic recovery.
Unemployment and high foreclosure aside, The Pew Center points to poor governance and unrestrained spending as a root of California’s troubles – and that is a teachable moment for other states, not to mention Congress.
California lawmakers since the late 1990s have increased spending by more than the rise in state population or inflation. In the meantime, policy makers rarely set aside in the rainy day fund the 5 percent of general funds permitted by law, giving the state less of a cushion during lean times.
California ran into trouble when it faced a budget shortfall, legislators couldn’t agree on tax hikes or budget cuts, and voters refused to raise taxes, too. There’s a commonsense solution for that problem: don’t spend more money than you have and save money for a rainy day. Like California, the other states in peril just don’t seem to grasp that simple axiom, and they ignored their economic realities while basing their spending decisions on the flawed assumption that revenue would continue to grow.
If there is one takeaway from the study, it’s this: leaders in state government need to muster the economic willpower to make the tough decisions to put their budgets back on the right track. That means cutting spending and making government smaller.
And the message to Congress, as it contemplates trillions of dollars in new spending? There is not an unlimited supply of revenue, and bad spending decisions can lead to economic disaster.