June 2006 NCSL State Legislatures Magazine: Ominous Outlook

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June 2006

June 2006 Contents

Ominous Outlook

America's fiscal future--with unprecedented liabilities and unfunded commitments--is grim indeed.

By: Nicole Casal Moore

The Growing Burden

The outlook for America's fiscal future is grim, says U.S. Comptroller General David Walker. And there are three big reasons: Medicare, Medicaid and Social Security. The federal government has made grand promises without solid plans for how it can keep solvent as baby boomers reach retirement age, and that means big trouble for states.

"Is this only a federal problem? The answer is 'no,' Walker said at NCSL' s Spring Forum in April. "Bad news flows downhill, to state and local governments, and eventually, to American families."

States might be the first to feel the sting. Marti Harkness, criminal justice director with the Florida Office of Program Policy Analysis and Government Accountability, sees a direct connection between the federal deficit and state finances.

"When the federal government can't balance its books, the states have to pick up the tab," Harkness said. "Everywhere, we're seeing more and more reductions in federal funds to states."

Congress shifted close to $75 billion in costs to states between FY 2004 and FY 2006. Under the president's FY 2007 budget proposal, that figure would grow past $100 billion, according to NCSL's latest Mandate Monitor. As of mid-April, the 109th Congress had enacted at least 19 laws that either impose new requirements on states without any new funding, or that cut the federal share of state-federal partnerships. More such bills are pending at a time when states' own future finances are uncertain. Expenses are outpacing revenues in many states, and for FY 2008, 19 expect structural deficits to materialize.

A close look at the federal financial picture helps explain why Congress might be increasingly compelled to export its deficit to the states. In 2000, Walker said, the nation's total liabilities and unfunded commitments were $20.4 trillion. That number includes money for Medicare and Social Security benefits, environmental cleanups, military and civilian pensions--the government's promises for future spending. During the past five years, that figure more than doubled to $46 trillion. That amounts, Walker said, to $156,000 for every person in the country.

The comptroller blames Medicare for most of the increase, $8.7 trillion of which he attributes to the new Part D prescription drug benefit. The program, which will provide drug coverage for some 42 million Americans, has a 75-year price tag that Walker describes as more than the nation's accumulated debt since it was founded in 1789.

"If that's not imprudent, I don't know what is," Walker said. "The difficulty is that we have not learned the first rule of holes: When you're in a hole, stop digging. The most imprudent thing you can do is to expand entitlement programs. And that's exactly what was done."

The slice of the federal budget pie set aside for "mandatory" spending, which includes Medicare, Medicaid and Social Security, is growing ever larger. In 1965, mandatory programs took up 27 percent of the budget. That grew to 42 percent by 1985, and to 54 percent by 2005, leaving less than half for "discretionary" programs like education, homeland security and transportation.

Walker doesn't expect the pace to slow. By 2030, he projects the GDP will grow by 72 percent in constant dollars, but Social Security spending will go up 147 percent, Medicaid 166 percent, and Medicare by 331 percent.

It's these long-term commitments, rather than immediate costs, that trouble Walker most. He pointed out that defense spending as a percentage of the federal budget has actually gone down during the past 40 years. In 1965, defense hogged 43 percent of the federal budget. Today, it takes up 20 percent.

Walker put costs associated with Iraq, Afghanistan and homeland security in perspective. The 2004-2005 budget, the most recent for which analysis is available, shows a 35 percent negative bottom line, Walker said. Its accrual-based deficit was a record-high $765 billion. Defense costs for Iraq, Afghanistan and homeland security account for a relatively small $100 billion of that.

The comptroller showed photos of his grandchildren while he urged Americans to adopt a new way of fiscal thinking.

Among his recommendations are:

Re-impose pay-as-you-go and spending cap federal budget controls that served the nation well through the 1990s.
Improve accounting and reporting metrics so that lawmakers and the general public will know how much money must be invested today to deliver on tomorrow's promises.
Drastically restructure Social Security, Medicare and Medicaid.

"The status quo is an unacceptable and unsustainable path," Walker said. "There's no way we can grow our way out of this problem. It's simple math."

The comptroller has supporters on both sides of the aisle, as well as in the middle.

Bob Bixby is the executive director of the Concord Coalition, a nonpartisan organization dedicated to "generationally responsible fiscal policy." When asked to point a finger of fault for the nation's current financial state, Bixby used a whole hand.

"Certainly Congress is to blame," he said. "So are the current and past administrations, and also the American people. The unsustainable problem is the long-term outlook, and that's because of promises that were made to future retirees. The promises were made without any plan for how to pay for them.

"Paying for things is not politically popular," Bixby added. "What you are rewarded for as a politician is increasing services and decreasing taxes. That's a toxic combination in terms of a budget."

This is a lesson West Virginia Delegate John Doyle learned years ago.

"It took Ross Perot in 1992 to explain to the American people and liberals like me the necessity for balancing the budget, and that was a fundamental transformation. We realized that this huge deficit was making it more difficult to fund all these wonderful programs. A light went on in our collective heads," said Doyle, who is chairman of NCSL's Budgets and Revenue Committee.

Light travels fast, but this beam of inspiration has yet to reach Washington, D.C.

Doyle says one thing state legislators can do to help solve these problems is to urge Congress not to extend the president's tax cuts. Walker discussed these briefly. His bar charts showed that extending them would put the nation deeper in debt.

Virginia Senator Emmett Hanger, a vice chair of NCSL's Budgets and Revenue Committee, agrees with the calls for belt-tightening. He would like to see his Republican party get back to its roots.

"We've been overtaken by the anti-tax individuals whose basic message has taken the focus away from a core principle of our party--fiscal responsibility," Hanger said. "Fiscal responsibility is broader than anti-tax. It's about balanced budgets."

The Growing Burden
The federal government undertakes a wide range of programs and activities that may either obligate the government to future spending or simply create an expectation for spending. These government liabilities and promises for future spending--or fiscal "exposures"--vary widely in source, extent of the government's legal obligation, likelihood of occurrence and magnitude. They include items such as retirement benefits, environmental cleanup costs and future social insurance benefits. The total federal fiscal unfunded commitments and liabilities have more than doubled since 2000, from $20.4 trillion to $46.4 trillion.

Nicole Casal Moore manages the public affairs department in NCSL's Denver office. See David Walker's slides and listen to his entire speech at www.ncsl.org/programs/press/2006/06forumnews.htm.

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