BRACK: State needs to deal with budget reform

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By Andy Brack, editor and publisher |  State governments suffer from a disease similar to traditional Wall Street investment: a focus on the near term.

00_icon_brackSouth Carolina, despite its AAA credit rating, isn’t any different in this regard. Politicians, by their very nature, focus on the short term. They have to, in one sense, because they face voters every two or four years. So to get reelected, they either have to do something quickly — in the short term — or do little, which perpetuates a broken structure.

What’s needed, according to a new report from former Federal Reserve Chairman Paul Volcker’s, is more of the kind of long-term approach favored by investors like Warren Buffett. If state governments really look at the long term, they’ll get off of the budgetary hamster wheel of moving from one shortfall to the next crisis.

“The continued fiscal stress is tempting states to continue, and even intensify, budgeting and accounting practices that obscure their true financial position, shift current costs onto future generations, and push off the need to make hard choices on spending priorities and revenue practices,” Volcker wrote in the introduction to a Volcker Alliance report released this week that looked at state budgeting practices.

A federal sign commemorating the Eisenhower Interstate System -- a huge national infrastructure investment -- from July 1993.  Photo from fhwa.dot.gov

A federal sign commemorating the Eisenhower Interstate System — a huge national infrastructure investment — from July 1993. Photo from fhwa.dot.gov

Ignoring the long term by favoring the short term has devastating impacts. In South Carolina, look no further than three gloomy examples:

  • Roads. Our roads and bridges need $40 billion over the next 25 years to make improvements and deal with deferred maintenance from the last 25 years. Failure to deal with it will hurt businesses because they won’t be able to move goods from Point A to Point B as easily. Legislators know all about the problem. But this session, despite pledges to do something big, they failed miserably.
  • Higher education. South Carolina has the highest tuition rates at public colleges and universities in the Southeast. Why? Because the state cut off billions of dollars in support over the last 20 years, causing colleges to raise tuition — particularly on out-of-state students — to deal with escalating costs. By failing to fund higher education adequately, infrastructure is decaying and parents pay higher costs.
  • K-12 education. Funding for public schools has been stabbed in the back over the last seven years because state lawmakers didn’t follow state law to fund education at established per-pupil levels. Instead, they underfunded schools by more than $3 billion, robbing students of resources because they weren’t willing to acknowledge education as the best investment in the state’s future.

The news might get worse because of how credit rating agencies view the short-term budget strategy of kicking the can of big problems down the road. What they worry about, one state official told us, is that not keeping up with big-ticket items, such as roads and buildings, will lead to a real big problem that will require a real big and costly fix — all at one time. And that, they believe, makes a state’s finances riskier, despite all of the rainy-day funds in the world.

Volcker’s report notes, “When budgets are balanced using accounting and other short-term and obscure fixes, the long-term consequences require a continual search for plugs to fill gaps in future budget cycles. The never-ending sense of fiscal crisis leads to stop-and-go funding of vital programs and stifles the need for serious discussions about policy practices.”

While Volcker’s report makes several budget reform recommendations, such as not using non-recurring dollars to pay for recurring costs, let’s go a step further. How about a new state Commission on the Future to develop meaningful and real budgeting reforms that focus on long-term recommendations and solutions for the state’s needs?

Such an effort should go beyond the 2010 Taxation and Realignment Commission mandate on figuring out tax reform. Such a new commission, comprised of former and current legislators and smart money managers, should draft meaningful legislation to reshape the structure of state budgeting and then lobby state leaders to get the job done (and not end up collecting dust on a library shelf).

Failing to deal with long-term problems year after year saddles future generations with obligations that we should pay now. There ain’t no free lunch and there never will be, despite the rosy goggles worn today by most state legislators.

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