Understanding the role of liabilities in fiscal stress.

• Position: News & Numbers

The budget crisis some states and local governments are confronting is the result of both current fiscal problems caused by the Great Recession and long-term issues relating to debt, pension obligations, and retiree health costs. Lumping these issues together, as recent media reports have done, creates "the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown, " according to a recent report from the Center on Budget Policy Priorities.

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Most states are projecting large operating deficits for fiscal 2012 that must be eliminated before the fiscal year begins--July 1, for most states. These shortfalls are caused largely by the weak economy, according to the report: "State revenues have stabilized after record losses but remain 12 percent below pre-recession levels, and localities also are experiencing diminished revenues. At the same time that revenues have declined, the need for public services has increased due to the rise in poverty and unemployment. Over the past three years, states and localities have used a combination of reserve funds and federal stimulus funds, along with budget cuts and tax increases, to close these recession-induced deficits. While these deficits have caused severe problems and states and localities are...