Thursday, May 28, 2009

Fiscal crisis in the states...

Buffalo or California?


Which is the better national bellwether?

If you believe New York University economist Nouriel Roubini, a.k.a. Doctor Doom, the recession will last until the end of next year. Roubini may once have been a marginal voice, but ever since all his predictions about Wall Street’s imminent collapse came true, he’s the soul of reason.

Famous economists tend to think in big strokes. People who balance budgets for state and local government get into the details. Here’s the connection: When the newly-credible economist predicts that economic trouble will last another 18 months, the bean-counters in state governments think about 18 months plus 12 months beyond, and they get very worried.

The good news is that there is “stimulus” money, thanks to Congress and the Obama administration. The bad news is that this extra money will run out before the end of the economic downturn.

Thus it’s now reasonable, and not far-fetched, to expect fiscal chaos in state and local governments in the next two years. Here’s what fiscal chaos means: more Californias.

Anger in the sun

California has always been about America’s future. California gave us Richard Nixon, Ronald Reagan, Jack Kemp, and, through its initiative-and-referendum process, an institutionalized anger about taxes.

The law known as Proposition 13 came about in the late 1970s, when an old guy named Howard Jarvis decided to wage a crusade against property taxes. Back then, folks were upset about inflation, especially as it hit the value of real estate. Jarvis’s crusade won, and property taxes got capped. Because of Proposition 13 and other ballot initiatives that have stripped away the power of elected legislators to actually make policy, California state government has to rely on the income tax, and California is bound by law to spend its money on the stuff that voters voting in referenda wanted.

What happens in a recession when both incomes and spending go down? Answer: California runs out of money.

But it’s even worse than that today. Because of the initiative-and-referendum process, even the budget that the Calfornia state legislature and governor just passed has no meaning. Last week, anti-tax sentiment among the 20 percent of voters who turned out to vote in the latest referendum effectively overturned the budget. Now, billions of dollars in basic road maintenance, education, environmental, and healthcare spending will have to be cut, leaving stranded commuters, shuttered schools, dirty water (where there is water), and approximately a million children without basic healthcare.

Pundits galore are predicting that the rest of the country will soon follow suit.

Anger in the rust

Some places are already there. In New York State, where Wall Street is experiencing a cautious, reticent, and altogether shaky rebound from the popped bubble, we already have the beginnings of an anti-tax movement—especially in those areas of New York State that are poorer and more dependent upon the tax revenue collected from Wall Street and in the New York City metro area. According to a 2004 study by the Center for Governmental Research, Upstate New York, which has 40 percent of the state’s population, receives about $11 billion more in state tax revenue than Upstate residents and businesses pay in.

Thus it’s no surprise that the chambers of commerce that are running the anti-tax, anti-union, anti-regulation campaign called “Unshackle Upstate” are reaching out to Tom Golisano’s Responsible New York to seize the moment and build a broader movement.

The trouble is, the calamity is going to look like this: All the folks who are income-eligible are going to receive their benefits, but all the stuff that governments provide that creates opportunities for community well-being will get squeezed or eliminated. County governments in particular will face the squeeze—because most counties have already seen 80 percent to 90 percent or more of their budgets committed (or “mandated”) by federal and state law.

So communities in Upstate New York are going to have to pay higher taxes for the mandated stuff even as their populations shrink and their real estate rolls stagnate. Not much higher, mind you—the average homeowner in Chautauqua County pays a real estate tax bill that is at most about four percent of total income, the average Erie County taxpayer pays even less, and the county portion of those bills is at most one-quarter of the total combined property tax bill. You can be sure, however, that if a county tax bill goes up $100, the rhetoric about it will make that bill sound like it’s a combination of theft and torture.

Of course, if Barack Obama succeeds in his quest to reform Medicare and Medicaid, and to rein in the increasing costs of those programs, then nobody’s county or state taxes need to rise.

Calm, rational discussion about what our state tax dollars buy is too much to hope for. Fortunately, the coming fiscal trouble of the states—and it is coming—won’t hit before the 2010 election, so some of the hot anti-tax rhetoric may be hard put to work politically. And most states probably will never experience the insanity of California governance, in which legal enactments of elected representatives can be overturned by ballot initiatives.

But the way state and local budgets work, any elected official who has to prepare a multi-year spending plan, or who wants to borrow money to fix a road or to repair a jailhouse roof, is going to have to ’fess up, as follows: President Obama and the Congress have us covered through the end of 2010 and into 2011, but after that, we are going to be at least in New York mode, with the squeeze on our quality-of-life amenities fully underway, if not in full California mode, with well-funded anti-tax campaigns succeeding in turning the lights out in clinics, schools, brownfield cleanups, and even prisons.

Meanwhile, in neighborhood news: The Canadian province of Alberta is joining the Organization of Petroleum-Exporting Countries, which should not be surprising, as Alberta is currently the largest single supplier of petroleum to the US. Rusty old Hamilton, a quick 50 miles from Buffalo and an even quicker 40 miles from Toronto, forges ahead with Blackberry billionaire Jim Balsillie’s formal offer this week to purchase a National Hockey League franchise and move it from Phoenix to Hamilton. The Golden Horseshoe regional plan predicts 13 percent population growth by 2020, while experts predict Western New York population erosion of at least six to eight percent.

By these and other actions, our highly taxed, highly regulated neighbors are demonstrating their distance from our stress. Apparently, they just want to sell us their oil and entertain themselves with some of the money they now spend on the Buffalo Sabres.

Back home, some folks here are noticing the convergence: fiscal stress in the next two budget cycles before the crisis hits; an increasingly bitter and acrimonious political climate; more and more money that is going to go for entitlement programs (especially healthcare) in an economy that is still shedding jobs. In that environment, what will become of parks, cultural institutions, libraries, environmental cleanup efforts, higher education, and, in general, a spirit of community? One hopes that an alternative movement may be forming. Stay tuned.

Bruce Fisher is visiting professor of economics and finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.