- Associated Press - Tuesday, July 17, 2012

U.S. states face long-term budget burdens that are already limiting their ability to pay for basic services such as law enforcement, local schools and transportation, a report released Tuesday said.

Aging populations and rising health care costs are inflating Medicaid and pension expenses. At the same time, revenue from sales and gas taxes is shrinking. And grants from the federal government, which provide about a third of state revenue, are likely to shrink, the report said.

Those challenges are made worse by a lack of planning by many states and the repeated use of one-time accounting gimmicks to cut costs, the report added.

The report was issued by the State Budget Crisis Task Force, a nonprofit co-chaired by former Federal Reserve Chairman Paul A. Volcker and former New York Lt. Gov. Richard Ravitch. It focused on six states that encompass about a third of the U.S. population: California, Illinois, New Jersey, New York, Texas and Virginia.

The states’ financial problems aren’t just a result of the recession and slow recovery, the report said. They have built up over years.

Increased spending on health care and pensions are crowding out other funding. Many states have already cut spending on public universities and infrastructure, such as roads and public transit, Mr. Ravitch said at a press conference Tuesday.

California has cut its spending on state universities 12.5 percent in the past five years, the report said. South Carolina has reduced its support 30 percent in that period, the deepest cuts in the country. Florida and Iowa have cut higher-education spending about 25 percent.

All that is making it harder for poorer Americans to attend college, Mr. Ravitch said.

“That does not augur well for economic growth in the future,” he said.

Diminished aid from states has pushed up tuition. Concerns are rising that some leading public universities, such as the universities of Michigan and Virginia, “are moving toward de facto privatization with high fees that effectively exclude many highly qualified lower-income students,” the report said.

To ease that burden, some states are providing more aid to needy students rather than spending directly on colleges and universities.

Long-term trends are squeezing state finances, the report said. Spending on Medicaid, the federal-state health care program for the poor, is growing much faster than state tax revenue. The Obama administration’s health care reform will likely accelerate that growth, it said. Medicaid already consumes a bigger portion of state budgets than does spending on elementary and high school education.

In addition, state and local government pension plans are at least $1 trillion short of what they need to pay for their pension promises. Even that figure is based on dubious assumptions by many states about the investment returns their pension funds will earn, the report said. Some studies using more realistic assumptions put the shortfall as high as $3 trillion.