Academics and Research / Magazine Feature

With the Great Recession in the rearview, states have long road to recovery

With the recession now officially over, state governments still have a long road — a very long road — to recover from the financial havoc left in its wake, experts told University of Denver Strategic Issues Program (SIP) panelists Nov. 4.

A crash in income tax and sales tax revenue, caused by job losses and tighter consumer spending, will have left a $537 billion revenue shortfall for states by 2013. Many states won’t see funding levels return to the levels seen in 2008 until 2015, explained Bill Pound, executive director of National Conference of State Legislatures (NCSL). Michigan, Pound said, is down to spending levels of 1992.

The SIP panel, led by Director Jim Griesemer, is studying the role of state governments in the 21st century. The panel has been hearing from experts in state and sub-national governments before attempting to draft recommendations on what states should address as primary functions. Several experts told the panel there is a new reality ahead, funding will be tighter in the future and the definition of what states should do may change.

Some states, Pound said, face some serious soul searching ahead. California, for example, has made all the “easy” cuts and attempted to raise revenue where it could.

“They simply do not have the revenue base to sustain what they’re doing,” he said. “They’ve either got to spend less or raise more.”

Looking ahead, states may have to challenge new federal health care mandates, and most can expect smaller state governments in the future.

Ron Snell, director of the state services division of NCSL, said one major area of concern is state retirement systems. State pension systems are underfunded by as much as $1 trillion nationwide, Snell said.

Moving forward, states may have to reevaluate pension programs by cutting cost-of-living adjustments for retirees and increasing the required years of service, or even employee contributions, by current workers.

One solution to the financial mess that’s often suggested is economic growth, said Tom Clark, executive vice president of the Metro Denver Economic Development Corp. and the Denver Metro Chamber of Commerce.

But while businesses have rewarded states with high-paying jobs for having an educated workforce in the past, states that struggle to balance budgets, like Colorado, are cutting funding to education — from pre-kindergarten to higher education.

Simply providing tax breaks to lure big industry doesn’t always pay off, Clark explained. In a down economy, corporations that aren’t making a lot of money don’t need the tax break, but they do need an educated workforce.

A successful economic development effort should be a total package aimed at luring a cluster of similar industries. In Colorado’s case, the state had success luring government laboratories, aviation, biotech and software giants, which in turn attracted other businesses in the same field.

But luring those clusters takes planning over decades, Clark said. And that planning should include education as a component.

The nonpartisan SIP panel is comprised of leaders in government, academia, business and public service. The panel will explore all facets of state governance in the coming year, from expenditures and funding to states’ relationships with federal and municipal governments. Griesemer expects the panel to complete its fact-finding and develop a consensus-based series of recommendations for state governments in 2011.

The next SIP meeting will be Dec. 9 from 8 a.m.–noon on the sixth floor of DU’s Daniels College of Business. The public is invited to attend.

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