No Way to Balance a Budget

How cash-strapped state governments are gaming their budgets
by Ben Lurie
Web Exclusive, May 2010
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Throughout the Great Recession, we’ve heard stories of homeowners selling off their property in an attempt to avoid financial ruin. It’s a desperate measure state governments are trying too. The American Prospect explains that in tough economic times, legislators will do whatever they can to put off cutting services or raising taxes.  In 2009, Arizona decided to sell and lease back more than a dozen public buildings—from prisons and office buildings to the Arizona State Hospital and even the Capitol building.

The sales earned the state $737 million which they were able to apply to a $3 billion budget shortfall. In exchange, they’ll be leasing the properties for between $60 and $70 million per year for the next 20 years–that’s around $1.2 billion including interest. Then in February 2010 they did it again, selling and then leasing another $300 million in property. Resorting to these kinds of extreme measures is inevitable in a country where every state but one—Vermont—is required by law to balance their budgets. 

“Public buildings should belong to the public,” Jon Shure, deputy director at the Arizona Center on Budget and Policy Priorities, told Stateline.org “It says a lot about the desperation the states feel, but desperation is clouding long-term judgment.” 

Arizona is not the only state gaming its budget. California is selling and leasing two dozen state buildings to fill $2 billion of its $20 billion budget gap. Chicago leased the rights to 75 years of parking meter revenues for in exchange for $1.15 billion, the plan was to set aside $400 million to earn interest, but one year later $167 million of the reserve was tapped to mitigate 2010 budget shortfalls

Minnesota saved $1.8 billion last summer by pushing back a chunk of school funding until 2011.  Then, in January they decided to delay an additional $400 million until May 30, 2010, leaving many schools out of cash by March.  

Some Minnesota school districts lost up to 25% of their annual budgets. “Think of it like your employer telling you they’re going to take a quarter of your salary and they’ll get it to you sometime later,” says Bill Hanson, manager of the Duluth, MN school district.  “In the meantime, you still have rent to pay and groceries to buy, so unless you have a little in a savings account, you’re going to need to do some borrowing.” The schools then have to borrow to pay employees and keep the lights on so the state can avoid long-term cuts or raising taxes. 

Commentators from Reason, a magazine that leans Libertarian, argue that the sell-then-lease approach is a far better option than raising taxes to balance the budget.  “Even a flawed sale-leaseback program is preferable to the alternative [of raising taxes],” writes Leonard Gilroy.  

However, Reason too condemns the short-sightedness of accepting long-term consequences for short-term gain.  Both those in favor of tax increases and those inclined towards spending cuts have to agree–this no way to balance a budget. 

Sources: Chicago Sun-Times, Duluth News Tribune, Los Angeles Times, Reason, Stateline.org, The American Prospect


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