State budget battles are escalating, but the tax-exempt bond market seems to be taking the struggles in stride. Bond yields are close to their lowest levels since 1979.
Last Friday alone, we carried news stories about New Jersey, Florida, Iowa, and Oregon, all states that are moving, with varying success, toward completing their fiscal plans for the year ahead. Governors and state legislators are confronting the difficult choices needed to bring spending into line with revenue, and the bond market apparently approves.
Investors, analysts, and raters are not so much concerned with state spending programs as they are with fiscal responsibility and governmental decisiveness. Wrangles between governors and legislators can lead to downgrades and higher borrowing costs, certainly, but the bond market is a tolerant place. It cares not so much how states tax and spend but more that they are businesslike about enacting budgets and sticking to them.
Of all the states, New Jersey currently is the most interesting laboratory experiment in fiscal affairs. Everything seems black and white in New Jersey, and everyone can see what works and what does not. First, Democratic Gov. Jim Florio came in and boldly increased taxes $2.8 billion to pay for the programs he felt voters wanted. He was dead wrong, and voters elected a Republican Legislature, which last week passed a $14.7 billion budget, more than $1 billion smaller than one proposed by Gov. Florio five months ago.
The cuts, New Jersey Democrats argued, are too deep, and Gov. Florio faced the tough decision of resolve whether to veto the whole budget or parts of it. The cuts are what taxpayers want, responded the state's Republicans, who probably could override a veto. The matter has to be settled before Wednesday, the start of New Jersey's fiscal year.
Florida faces similar problems. Last week, the Florida Senate passed a no-new-taxes budget with $10.9 billion of spending, a measure that Gov. Lawton Chiles threatened to veto because he wanted $1.3 billion of additional revenue. He said the money is needed to avoid debilitating cutbacks in health-care services and education.
And so it goes from state to state. Oregon's Gov. Barbara Roberts proposed the state's first sales tax to make up from a revenue shortfall caused by voter approval of property tax limits. In Iowa last week, Gov. Terry Branstad and legislators agreed on measures to reduce a $338 million budget deficit by $132 million.
As long as state governments keep performing this tough budget work at this pace, the bond market will reward them with low-cost bond money. There has to be some compensation for their efforts, which from a distance don't look like much fun.