Fiscal Dynamics | The State Budget vs. Household Budget Argument
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by Brian Sullivan | Sep 14, 2017 12:08am () Comments | Commenting has expired | Share
Posted to: Analysis, Business, Consumer Protection, Opinion, Sponsored Opinion, Financial Sector
People often compare the state budget to a household budget. We hear it all the time:
“If I ran my household like the state, I’d be broke!”
First, they would be right. The state is broke. But, is this a fair comparison?
Who Can Agree on What’s Truly Frivolous?
In personal finance we discuss frivolous spending by first defining it as “lifestyle.” Our personal lifestyles choices around money do not include basic needs. Some have higher basic needs than others. People in sales jobs often need new cars more often than the rest of us because of the additional miles they put on their cars. Programmers may need to a new computer every two years to do their job. Parents with young children need higher clothing budgets because their kids are growing.
The frivolous component comes from decisions surrounding those choices. A BMW instead of a Toyota, a 2 terabyte internal hard drive instead of an external, or Brooks Brothers sweaters for the kids instead of Gap or Target. These are all choices that graduate a family from needs to frivolity.
On the State budget side, we do see frivolity being slashed in too many places to list. According to CTNewsJunkie, Executive Branch belt tightening has included everything from the cancellation of the annual Christmas party for the news media at the governor’s mansion to reducing redundant or unneeded state positions by 1,100 last year. Unlike your household decision to cut your own grass instead of paying a landscaping service, members of the General Assembly can’t all get behind mowers or pick up weedwackers to help reduce the cost of maintaining the hundreds of miles of state roads and properties.
Moreover, when bad financial times come, often state spending increases because more people are in need of basic aid.
Immediate Needs vs. Long-Term Needs
If our basic needs are threatened, we can make other financial decisions that hurt us later, but which also shield us from current crisis. If we need more cash flow now, for instance, we may make the choice to discontinue maxing out a 401(k) contribution. That may hurt our financial security in the future, but it can provide the needed short-term funding to pay off loans, or get through the early years of daycare costs.
Conversely, the State is contractually obligated to pay state employee pensions. More careful and deliberate thought must go into making these promises — or you get into the unfunded pension liability situation we’re in today.
The state does have some advantages on us for shoring up the coffers. Very often we hear the comparison of “charging” projects on the state credit card when issuing bonds. The main issue around this is a term called debt service. The state can service that debt (at an interest rate of 4-6 percent typically) much easier than you or I can service an 18-25 percent credit card rate.
The bad side of this is bond servicing can quickly become someone else’s problem — elections are funny that way. A household is stuck with its debt and therefore makes its own debt decisions. When it comes to elections, imagine the difficulty in buying a house and also being saddled with the previous owners second mortgage!
Family Financial Decisions Are Easier Than Herding the Cats at the Capitol
Making tough decisions within your own household, and within your own sense of morality, is not the same as making decisions for everyone in the state. It is nearly impossible to get 3.5 million people on the same page (or at least the 151 folks in the General Assembly).
It’s easier to negotiate tough financial decisions like becoming a one-car family, than it is to get everyone in the General Assembly to agree to take away state aid to municipalities for education or road construction.
We have tremendous power and ability to control our own finances — there is no dearth of financial professionals in Connecticut. State lawmakers have hard and near impossible choices to make, which include not only the facts of the matters at hand but also the political wiggles and whines of special interest groups.
Financial planning involves goal setting. I have not heard much about specific or trackable goals set by any politicians with regard to the state budget.
Here are some examples of goals that I’d like to see:
1. Every municipality should make measurable strides toward becoming economically vibrant enough to become self-sustaining by 2025.
2. Accumulating enough funds in the highway budget accounts to provide maintenance to state roads and bridges at only 4 percent of balance by 2050.
3. Honor all current contracts, but in the next negotiations outline the needed services we want to pay for and eliminate the frivolous services we offer now.
DISCLAIMER: The views, opinions, positions, or strategies expressed by the author are theirs alone, and do not necessarily reflect the views, opinions, or positions of CTNewsJunkie.com.