The State and Local Budget Crisis

How big a budget problem are we facing at the state and local levels?

Ravitch: There are 19 million employees of state and city governments, there are four trillion dollars of tax municipal securities outstanding, there are a billion and a half or a trillion and a half, rather, dollars of unfunded healthcare liabilities to state and local employees, and there are trillions of dollars of unfunded pension obligations. And it varies from state to state and city to city. But it is a problem that is not diminishing either in size or complexity. And it is probably the most underreported economic fact in American society.

Schleicher: I think on top of that part of the thing is that we really don’t know in a lot of important ways. Things will come up. Crises will come up: Puerto Rico, Chicago, Center Falls, Stockton—but there are a lot of places—very many jurisdictions—that have kind of long term problems that they’ve covered up in a variety of ways using tools both legal and semi-legal to do so. And the result is that our ability to grasp what the problem is, particularly what the potential risks are… So, if the economy continues going great, there’s one set of problems and certain places may still be over their skis. But if things go in a different direction, the number of genuine crises will go up substantially. So one part of this class is about not just about how to solve the problem but understanding what the problem is.

How does Federalism come into play in the seminar and in these issues?

Schleicher: One of the things that’s been interesting about this to me is that there’s law all the way down in all of these issues. Traditional law school treatments of federalism and localism focus largely on regulatory issues. The regulatory power of the federal government vis a vis the state government and state governments vis a vis local governments and limits thereon and all the varieties of things that may occur. This class is about the other side of Federalism. It’s about the ways in which, as fiscal bodies, the federal government, state governments, and local governments interact. That involves taking things from a variety of different places throughout the law school curriculum. So we do things on state and local tax. We do things on statutory interpretation and legislation and budget process. We do things on municipal bankruptcy, which is not in any traditional law school curriculum. We do things on local government law, which is my particular background.

Ravitch: You know, it’s very interesting, when I was a student at Yale Law School, the major issues were: Should the federal government have the right to tell the state that they can’t discriminate on the grounds of race or religion. The issues were state’s rights, versus all of the causes that were implicitly part of the value system that most of us shared at Yale Law School about how to make the world a more just and fairer place. And the argument was, hey, those are the prerogatives of states. And now we’re sitting here 58 years later, talking about what can be done to make sure that the federal government pays attention to the fact that the part of our system that is responsible for public safety, education, and healthcare is adequately funded to meet the most minimal level of needs.

What is it like to teach The State and Local Budget Seminar together?

Schleicher: One of the things that’s fun about the class is the world keeps moving in this area. The timing of the course again, it’s not unintentional or anything, but couldn’t have been any better. So, Puerto Rico is happening in the news in front of us; we’re having a class on Puerto Rico next week. Things in Chicago keep happening—a major tax increase in the last couple of days—and we’re having a class on Chicago. This is a course of its time. The result is that I’m constantly calling Dick, and when Dick and I are talking, and I’m like, “Okay, let’s plan the class, but also, what the heck is going on in Puerto Rico? Did you see this thing in the paper?” And it’s been wonderful—I’m working on a paper that’s springing from this, and—the way in which the world keeps on moving in this area is so—this is such a crucial issue and it’s happening right now—has led to this being a super fun experience both for the purposes of the class and just for me personally and then for my scholarship.

Ravitch: You know, my interest in this subject started obviously when I was involved in the ’70s with New York City’s near bankruptcy. But then when I was briefly lieutenant governor of New York State and was appalled by the budget practices that the state was engaged in, that’s when I said to my friend Paul Volcker, with whom I had shared offices for 16 years at that point. I said, “We’ve got to raise some money. Nobody’s studying this.” This issue is so incredibly important to the people in this country, and it’s not well understood, and it’s not well reported. So I think we’re doing a very valuable service by getting the next generation of leaders in the bar and in politics and in public service to understand how important this subject is.

Schleicher: That was a really nice moment at lunch a few minutes ago when our student said, “I had no idea how hard this would be.” Not how hard the class would be. Maybe that also, but how hard these problems are. The kind of sound bite solutions that you hear when people deign to talk about state budget crises at the national level are wildly insufficient for thinking about the problems. And the number of people who are thinking about it are…is no one. I mean, not no one, but almost no one.

Ravitch: Few and far between.

What is the impact of the lack of knowledge about state and local budgets?

Ravitch: The ignorance universally in this subject is really quite fascinating. If you talk to members of Congress, for example, they are so unaware of the issue and unaffected by it politically. So, if a state is going broke, or a city is going broke, or a city, as most do, has to let teachers go or raise the tuition for public universities, the members of Congress are not involved. There is a tragic disconnect between what’s happening in Washington and what’s happening in state and local governments throughout the United States.

Schleicher: To the extent they do think about it, they assume that certain legal tools help solve the problem, so state balanced budget amendments, limits on debt issuant. They assume that the parchment barriers will solve some of the problems, and they aren’t.

Ravitch: There are always people at Yale Law School who want to go into the federal government. I had classmates who worked for Senator Kennedy, Senator Symington, and I worked on the hill, and other people worked a lot at the justice department, etc. I don’t remember anybody wanting to work in a municipal government. And I can tell you, for all the years that I was involved in state and local government…they didn’t…they had a tough time attracting talent. There wasn’t the glamour associated with going to Washington. And yet, if you think about it, there are 19 million employees in state and city government, two million civilian employees of the federal government, and the responsibility for all the important things the government does are the responsibilities of state and local government.

Schleicher: Police, housing, schools.

Ravitch: Healthcare, education.

Schleicher: Yeah, and it needs the talent. The great thing about it is that in many places, the ability to get involved and have real responsibility can come much faster.