For many states, the fiscal picture for the next year remains cloudy at best. After years of painful spending cuts, how can states balance their budgets without further damaging essential public investments? A new report from United for a Fair Economy (UFE) lays out a few important guidelines for budget reform.
Among the more interesting recommendations: States shouldn't be afraid to meet spending needs by borrowing or drawing down their rainy day funds — but should do each in a straightforward and rational manner. This means that states seeking to adequately fund public investments that benefit future generations (such as transportation spending) shouldn't feel bad about issuing general obligation debt to fund these needs, ensuring that future generations will pay part of the cost of funding these investments. (Of course, lawmakers generally don't need any help shifting costs to future generations, but it's important to remember that there is, in some areas, a sound rationale for doing so.)
On rainy day funds, the report is a reminder that when the rainy days come, the funds should be used — and that damaging cuts to education and health care spending are a far worse result than depleting state reserves.
Responding to a recent report from the Pew Center for the States that generated hysterical headlines about unfunded state pension systems, the UFE report also notes that in the short run, unfunded long-term liabilities of the sort documented in the Pew report are a far better alternative than the loss of vital public services in the present day.
As the report reminds us, virtually every state could avoid damaging spending cuts through progressive tax reform focused on the state income tax — but these other tools should also be considered before resorting to further across-the-board spending cuts.