State Budget Catastrophe

I want all of you who are nervous about state budgets to rest easy. States, like the Federal Government, are not allowed to lie.

Just kidding. They are lying like rugs.

Meredith Whitney, the scourge of state budget apologists, has just completed a more thorough study of states’ financial situations, and it ain’t pretty. Even if you find specific talk about budgets painful, please take the time to read this one. It is that important.

A couple of things to keep in mind. First, states have been promising for years things that they cannot possibly deliver. Pensions are underfunded in a big and serious way. In order to cover future expenditures, gargantuan tax increases will be necessary. Second, that is just the part you and I see. There are numerous items in a category that few people know about:

And those figures don’t include future spending on health care costs, falling into a little-known category called OPEB or Other Post Employment Benefits. Most states simply pay these OPEB costs directly from revenues. No actual income-generating funds, accumulated for the future, back them in most states. New Jersey, New York, Connecticut and Illinois are all pay-as-you go states with totally unfunded OPEB liabilities.

In other words, as these expenditures swell, states will be in even worse shape.

I don’t know about you, but I feel a little funny about the following conversation:

State of Illinois: “We need money.”

Voters: “And…”

IL: “We are going to take it from you.”

Voters: “Do tell.”

IL: “But you will get really good stuff for it.”

Voters: “Just like the good stuff you’ve managed to do so far?”

IL: “Huh?”

Voters: “Nevermind. Tell you what. You need money, right?”

IL: (Anxiously) “Yes!”

Voters: “Go pound sand.”

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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