Permanently solving fiscal problems: a modern day fable for the States.

• Author: Gunyou, John
• Position: Includes related articles

In January 1991, newly elected Governor Arne H. Carlson inherited the worst financial crisis in Minnesota's history. Now, less than three years later, that $2 billion deficit has been turned into a $623 million surplus, Minnesota's $500 million rainy-day fund has been restored, and a balanced budget is projected for the next four years.

The first part of the story is familiar to many states. The 9happy ending is not as common.

What Is the Moral of the Story?

It is first important to understand and acknowledge that the fiscal crisis faced by the states is neither temporary nor unexpected. It is chronic and self-inflicted.

Although the end of the economic expansion that states enjoyed during the last decade definitely worsened their situations, the fiscal problems of the states will remain even after the economy fully recovers unless fundamental changes are introduced into the way they do business. The seeds of trouble were planted well before the recession when states built up an expensive structure of expectations that they can no longer afford. There are three fundamental problems.

First, states succumbed to the same near-sighted focus that has infected corporate America by making short-term decisions without regard to long-term consequences. During good times, they spent all they had on the "flavor of the month." During bad times, they raised taxes. For example, in 1989, Minnesota used a one-time windfall of $200 million to fund the initial costs of a politically popular, ongoing property tax relief program, with little regard to its future ability to sustain these expensive commitments. This single irresponsible action caused at least one-third of the state's recent fiscal crisis, and it had nothing to do with the recession.

Second, all levels of government suffer under systems that foster current spending over investments for the future. They emphasize immediate solutions to current problems and insist on maintaining outdated and costly service delivery systems, all at the expense of funding for preventative intervention. For example, countless studies have documented the cost effectiveness of investments in early childhood programs. One such study demonstrated that the savings resulting from early intervention more than cover the program costs in just four or five years. Another study showed that for every public dollar spent on prenatal care, savings on medical assistance costs during the first 60 days of life ranged from $3 to $4. These are paybacks that...