Sunday, June 7, 2009

State Government Budgets and Budget Equilibrium

About one third of the 50 States have major budget problems in relation to spending versus revenue. To listen to the State Legislators, of the States in financial problems, the budget size and revenue short fall seems to be characterized as a "surprise".

Surprise? More like a Train Wreck that has been advertised, predicted and known for over a decade.

Moreover, the State Budgets that are being cut are not reaching equilibrium with revenue due to the lack of government payroll cuts and/or pay cuts. State Legislators will cut all sorts of service programs but are leaving State Government Payrolls basically stable.

With the Private Sector laying off millions of workers and the remaining employed, in many cases, taking major hair cuts in wages, why is it that State Government doesn't follow suit? With economic activity shrinking leading to revenues declining in the Private Sector, jobs must be shed. With declining tax revenues affecting the Public Sector, no corresponding labor reductions exist.

The unionized Government work force, and that unionized work force in many cases being large political supporters of Governors and State Legislators, there becomes no political incentive for State Payroll reductions. Likely the payrolls of the States remain constant due to politics not economics.

State Budget cut backs are related to a movement toward revenue/service Equilibrium. For the last decade many State Governments have provided champagne services on a beer budget. State budgets based on providing ever increasing and expanding services based on increasing tax revenue. That the increasing tax revenue stream was further used to finance debt used to increase services that could not be paid for on a current account basis.
When tax revenues suddenly fell due to the Macro Economy in recession, State Legislators were caught in the same mind set as the participants of the Housing Bubble: what goes up continues to go up.

Equilibrium in State Budgets will not be achieved until service cuts backs are matched with corresponding employment cut backs. Currently there is movement toward budget/revenue Equilibrium in the several States, however its merely movement. Equilibrium will not be achieved until State Government Payrolls are reduced significantly.

Finally, due to a decade long over spending, based on the mind set that tax revenues would increase perpetually, large debts have been assumed by the States. Even after economic recovery, State services and State Employee Payrolls have to remain constant as the large debt roll ups need paid off due to over spending in the past.

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