Fate of the States: The New Geography of American Prosperity (12 page)

There’s a reason politicians put off making hard decisions. After all, why alienate key constituencies in order to solve a problem that might not come to a head until after they’ve left office? But with this budget crisis, ignoring and procrastinating may not work. The mayor who turns a blind eye risks his city sliding into Detroit-like despair and disrepair. The governor who does not act risks letting his state become America’s Greece—subjecting her citizens to all the privations associated with austerity budgeting. He risks sinking his state or city into an economic feedback loop from hell—one in which budget deficits beget tax hikes and spending cuts, which drive away jobs, further eroding the tax base and deepening the budget crisis that the hikes and cuts were intended to fix. Look at what’s happened in the actual Greece. The
bottom
income-tax rate there has increased from 5 percent in 2000 to 18 percent in 2010.
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Greece’s unemployment now exceeds 24 percent, and the GDP has declined 6 percent per year for two consecutive years.
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Alexandros Adamidis, a business-relocation expert in Bulgaria, recently told a Greek newspaper that he receives “10 phone calls a day” from Greek businesses seeking to relocate.
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The
Financial Post
reported that between April 2011 and April 2012, some seven thousand Greeks left Greece for Germany in search of jobs and lower taxes.
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This is the fate elected officials in housing-bust states are tempting if they fail to fix their finances.

American consumers love their credit cards—sometimes too much. Politicians like to buy on credit too. But while consumers know there’s a downside to revolving credit-card debt, politicians actually have little incentive to do anything but revolve because they’ll be gone before the bigger bill comes due. Plus the new spending facilitated by increased borrowing is good politics. While some of the increased state spending has gone to fund vital projects and services, a disproportionate amount has gone to state employees—hiring more people (1.4 million) and, more often, increasing existing employees’ pay and benefits. Given the tremendous escalation in pay, pension, and other benefits over the past decade, it is hard to imagine that any mayor, school-board member, or city councilman actually believed these deals would be affordable in the future. But because these increases are contractual, they are difficult to abrogate or trim. The actual amount of “discretionary spending” in most budgets is quite low. The Las Vegas school system tried to close its budget gap by suspending contractually negotiated teacher pay raises, a solution vehemently opposed by the teachers’ union; an arbitrator wound up ruling in favor of the union, forcing districtwide layoffs. Indeed, what ends up being the most discretionary are the expenditures that have the most tangible impact on everyday life—social services, road repairs, new textbooks for classrooms, additional teachers to reduce class sizes, school buses, police and fire-safety vehicles, parks, libraries, and all the other services individuals and families depend upon. Over the past five years, $290 billion has been cut from such core services. But the real pain will be felt over the years to come, as “emergency” money that was meant to cushion the blow eventually runs out. In the past four years, the money saved through spending cuts at the state level accounted for less than half of the dollars used to close budget gaps. Until now, states have been able to bridge budget gaps by tapping rainy-day funds, accessing federal stimulus money, increasing taxes, or borrowing more money via the bond market. But these levers have all already been pulled.

We have reached a breaking point for some states. There is no more money. There are no more stimulus dollars. There are no more rainy-day funds to raid. The emergency options have all been tapped. From 2008 to 2012 states squeezed just under $600 billion from one-time measures to close budget gaps.
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Spending on schools, public safety, and other vital services still got slashed. What will be next? And how bad will things get?

Cumulative Measures Used to Close Budget Gaps (FY08–12)

SOURCES: BLS AND MWAG

Politically it is far easier to increase than decrease spending, and elected officials have gone to great lengths to avoid the politically painful steps required to rein in spending. More often than not, rather than align expenses with current tax receipts, elected officials have just borrowed more—taking from the till of future tax dollars—to pay for current government spending on projects and goodies. Because tax receipts have little bearing on state spending, spending has outpaced tax receipts by a factor of two since 2000. Now the inevitable spending cuts have finally arrived, and the most vital government services are the ones bearing the brunt.

Education

For most states, the biggest budget expenditure is education, both K-12 education and higher education. K-12 accounts for 20 percent of spending, whereas higher education accounts for 10 percent, on average.
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The next-largest state expense is Medicaid, which is growing two or three times faster than most state budgets. Clearly the explosion in Medicaid expenses has left less of the budget available for education and infrastructure projects. While a pothole or two may not be a game-changing risk in the near term, cuts to education are serious near-, medium-, and long-term threats to the quality of life within a state.

According to the Center on Budget and Policy Priorities, thirty-seven states reduced per-student funding to their school districts in 2011, and seventeen states cut per-student education funding to a level below where it was prerecession. Higher education has been hit especially hard: Funding for public colleges and universities has been reduced by an average of 11 percent since 2010, to the lowest levels since the 1980s, according to the State Higher Education Executive Officers Association. Higher education is discretionary, and discretionary items are always most vulnerable. Consider that from fiscal year 2011 to fiscal year 2012, while state general-fund spending on Medicaid increased by $16 billion, general funds cut more than $5 billion from higher education and $2.5 billion from K-12 education. Remember, most K-12 spending comes from municipal monies, and cuts to K-12 education are far more damaging to the quality of teaching, since funding cuts cannot be offset with tuition hikes, as has been the case with public colleges and universities.
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Other than moving, families have few ways to protect their children from the corrosive impact of shrinking school budgets. Sure, private schools are an option for those who can afford them, as are charter schools for families fortunate enough to get a slot. In 2011 Tanya Moton pulled her daughter out of a public school in order to enroll her in a nearby charter school. “The classes were too big, the kids were unruly and didn’t pay attention to teachers,” she told the
New York Times
of the former school.
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But Tanya Moton is one of the lucky ones. Nationally, only 13 percent of public-school students attend charter schools.
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Moreover, charter schools are not immune to budget cuts. In 2012 the Philadelphia school district cut its payout to city charter schools by $700 per pupil, a 7 percent reduction in funding. “Charter schools are going to have to . . . be more efficient and find ways to serve [students] in a leaner and more creative way,” said Lawrence Jones, president of the Pennsylvania Coalition of Public Charter Schools.
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States walloped by the real-estate bust, such as California, have had to make the deepest cuts. From 2007 to 2011 California’s GDP contracted by over $28 billion. In other words, after a five-year period in which the state issued $397 billion of debt and increased the size of its unfunded pension liability by almost $80 billion, its economy still wound up worse off.
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California used to be the gold standard for public education. From universities to grade schools, its education standards were the top in the nation. Since 2008, however, California has cut more than $6 billion from education spending.
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There’s less money for textbooks, teachers, and arts and sports programs. With fewer teachers, “virtual classrooms” are sprouting up in which a live teacher is telecast into a classroom but without any actual physical classroom presence. In 1990 California had a 1.3 percent lead over the United States as a whole in the share of its population that had graduated from high school. By 2008 California’s population had 6 percent fewer high-school graduates than the national average. In many school systems it’s the arts and music programs that are cut first. Art teachers who survive layoffs are often reduced to going classroom to classroom offering “art on a cart” like hot-dog vendors. In 2008 the Los Angeles Unified School District had to suspend one of its key arts programs because of a spending freeze. In 2011 San Diego Unified School District’s visual- and performing-arts program faced a $2.8 million cut—from a $3 million budget. This was part of an effort to plug a $120 million hole in the school district’s $1.2 billion budget. That $2.8 million in cuts amounted to just 0.23 percent of the budget.
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In wealthier communities, raffles, bake sales, and other fund-raisers sometimes help save arts and music programs on the verge of being axed, preserving parents’ dreams of watching a son or daughter play violin in a school orchestra. In poorer communities such dreams die without proper funding.

Cuts are also coming out of basic programs such as busing. Last year Illinois cut $89 million from its school-transportation budget. In Lake Elsinore, California, school-bus service was scrapped entirely, forcing students to find their own way to school. “There are enough crosses on the side of the road. We don’t need more,” Salvador Sepulveda beseeched the Lake Elsinore school board before it voted to end bus service. Sepulveda believed it was simply too dangerous for his grandson—a first grader—to walk to school. Yes, some kids can get a ride to school with parents, but for some of those parents the added cost of gas is a burden. Others risk being late for work.
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After doing what they could to raise revenues through higher property taxes, school systems have had to cut and cut deeply in order to balance their budgets. K-12 public education is free, of course, so raising tuition rates was never an option. But higher education is a different story. State universities have the ability to collect—and raise—tuition. Recall the protests in Oakland and Davis, a town just outside Sacramento, during the spring of 2010. Hundreds of college students tried to block interstate highways in protest of spending cuts for education.
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They knew these cuts were simply a prelude to tuition hikes in 2011. Not surprisingly, the states hit hardest by the housing bust and large budget deficits have seen the sharpest spikes in the cost of tuition for four-year colleges. Arizona, California, and Nevada saw tuition costs rise by 94 percent, 80 percent, and 76 percent respectively between the 2004–5 and 2011–12 school years. Nationally, only Maryland and Ohio saw state tuition actually decline over the same time periods.
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Which states have the highest tuitions? Three of the five—Illinois, Michigan, and New Jersey—are states with faltering economies and massive state budget shortfalls. Cuts to higher education have been so deep in these states that their public colleges and universities have been forced to charge tuitions 50 percent above the national average. In Illinois, Michigan, and New Jersey, average tuitions for four-year public colleges were $10,975, $10,170, and $11,667 respectively, according to the College Board, versus the national average of $7,506.
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Since 2007 California has cut $2 billion from higher-education spending. These cuts caused an 80 percent spike in tuition costs, and now only 18 percent of California high-school graduates are enrolled in state colleges or universities, versus 22 percent prior to 2007. And it’s not just the four-year colleges that are affected: In-state enrollment in community colleges has shrunk from 2.9 to 2.4 million.
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In 1990 California’s population had 15 percent more college graduates than the national average. Twenty years later, that big advantage has been halved to just 7 percent.
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In case you’re wondering, Wyoming boasts the lowest public-university tuition, at $3,917, even as the state’s overall per-capita spending on higher education is third highest in the country.
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Perhaps not coincidentally, Wyoming now boasts the fifth-highest per-capita income in the country, making it the only rural state among the top five. Of course, massive tuition hikes serve to exacerbate the student-loan crisis, a $1 trillion problem sure to end badly if the job market for twentysomethings doesn’t improve. According to the Economic Policy Institute, 9.4 percent of college graduates ages twenty-one to twenty-four were unemployed in 2011 and another 19.1 percent were underemployed—and thus unlikely to be earning enough to repay their student loans.
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