State Budgets Facing Financial Peril

I took this headline right from a CNN article. Many of these states are different than what I posted about just last month here. As I have stated on many occasions, state budgets lag the overall economy by at least year, usually two. This was a lesson learned in California where I worked for a County government and layoffs typically followed recession by 18-24 months. Governments can typically fill one or sometimes even two-year budget gaps using stopgap measures like borrowing money or pushing out expenses to a future date. Spread budget problems out to three years or more and things really start to pile up.

Why is this a big deal? Well, projected cuts to state budgets to make ends meet could lead to a loss of almost 900,000 jobs. These layoffs would begin next fiscal year which starts in July in most states.

It is absolutely amazing to me that there is a recognized economist in this article that is saying that there needs to be MORE federal stimulus to fill budget gaps in state budgets for 2011. Stimulus simply is a way to borrow against future production. It's really that simple. The solution to a spending problem isn't borrowing money to continue spending too much. The solution to a spending problem is to spend less.

I do agree with the economist that "budget cuts and tax increases will be a serious drag on the economy at just the wrong time".

My belief is that creative destruction needs to take place. This will mean a painful adjustment for some, however, it is the right path and it needs to take place in order for us to go through this. One of my favorite investment/economics writes often, "In order to get through this, we need to go through this." We are in for years of high unemployment. It will be the new normal. Central Bank economists are predicting that unemployment will continue to remain high for "years to come".

The last Pennsylvania budget gap was filled by federal fiscal stimulus funds. We are already $3 billion behind heading into the 2010-2011 budget. How that gets filled is anyone's guess. This kind of fiscal problem is going to trickle down to our District budget at some point. While Mt. Lebanon gets a huge majority of its funding from local tax dollars, even a reduction of 5% of state funding would be significant.

There is no easy way out of this for states or, eventually, for local governments. Belt tightening will have to take place at some point. The hope I have is that we make decisions that make the most long-term sense. If we can focus our decisions on future government entities and the impact our decisions today will have on these entities five and even ten (or longer) years down the road, then we can start to lay in stone a path for financial stability.

Thanks for reading.

James