Mike Genest: Ensuring state and municipal solvency

150 150 Mike Genest

When I retired as Governor Schwarzenegger’s Director of Finance at the end of last year, I decided that I wanted to remain involved in state policy, especially surrounding our troubled budget. My years of experience in “the belly of the beast” made me a firm believer in the need to reform our budget process. So, when Bob Hertzberg asked me to get involved with California Forward I, to repeat the malapropism of a popular TV ad, jumped in it!

But, as we continue to push for reforms in our budget process, we need to also bear in mind the challenges to which that process has been and will continue to be put. Everyone knows that our highly cyclical revenue and our leaders’ historical lack of will power have combined to create a structural deficit that we have yet to resolve. The devastating impact of the current recession on the state budget is equally well known.

What may not be as widely appreciated, however, is how troubling are our state’s longer term fiscal challenges. Two recent reports should help to shed light on the longer-term challenges faced, not just by California, but by all states and most local governments, as well.

The US Government Accountability Office (GAO) regularly publishes its Outlook for State and Local Government Budgets, most recently in March 2010. The report finds that the combined budget deficits of all state and local governments equated to about one-percent of the nation’s GDP in 2010. Most people recognize that is a huge number, and anyone paying attention in California knows that our share of it has meant a great deal of pain and dislocation. Now, try to imagine what would happen if our deficit was five times worse!

The GAO Outlook projects just that. State and local deficits will, in the absence of massive changes, reach a total equal to more than five-percent of national GDP in 50 years. No one, of course, knows what will actually happen that far in the future, but the GAO projections are based on moderate annual growth in US GDP and current trends in Medicaid, pensions, and retiree health care. There can be no question that, to use President Obama’s words, those trend lines will have to be bent – and the sooner the better.

Another recent report of note is, “Ensuring State and Municipal Solvency,” published this month by the Milken Institute, in association with the Kaufman Foundation of Entrepreneurship. This report was the product of a day-long conference of 40 experts drawn from think tanks; federal, state and local governments; unions; the financial community; and one little ol’ retired Director of Finance – me (another TV ad reference, but you have to be at least as old as I to get that one).

“Ensuring State and Municipal Solvency,” looks at the immediate and longer-term fiscal pressures facing state and local governments and concludes that pretty much everything imaginable must be tried to fix the problem, up to and including bankruptcy (many states, including California, allow municipalities access to bankruptcy, although that option is not available to states themselves). Some of the solutions mentioned in the report resonate with California Forward’s ideas: multi-year budgeting and rainy-day funds, for example. Others fall outside California Forward’s current reform agenda: broadening tax bases and reforming pensions, for example.

What both of these reports make clear is that big, even massive changes are needed, not just to our budgeting processes, but to our governments themselves. As Bob Dylan said, “the times, they are a’ changin’.” Who knows what drastic adjustments our state and local governments will have to endure in the coming decades. What we do know is that our current budget process is short-sighted, too distant from the people, and not designed to maximize the effectiveness or efficiency of governmental programs. We will need a much better system as we face the challenges ahead. That is why the work of reformers like California Forward is so important.

Mike Genest is the former Director of the California Department of Finance.


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