State Budget Troubles Worsen


The Center on Budget & Policy Priorities reports that state budget troubles worsen:

(emphasis mine)


STATE BUDGET TROUBLES WORSEN
By Elizabeth McNichol and Iris J. Lav

States are facing a great fiscal crisis. At least 43 states faced or are facing shortfalls in their budgets for this and/or next year. States are currently at the mid-point of their fiscal year — which started July 1 in most states — and are in the process of preparing their budgets for the next year. The outlook for state budgets remains grim.

Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year — which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps have opened up in the budgets of at least 37 states plus the District of Columbia after they struggled to close the largest budget shortfalls seen since the recession of 2001. And these problems are expected to continue into next year.

Current estimates are that mid-year gaps total $31.2 billion — 7.2 percent of these states' budgets — but they will almost certainly widen as the continuing economic turmoil causes revenues to come in below estimates in more states.

The 37 states facing mid-year fiscal year 2009 shortfalls are Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, Washington, and Wisconsin. In addition, the District of Columbia faces a budget shortfall. These budget gaps are in addition to the shortfalls that these and other states faced as they adopted their budgets for the current fiscal year. At that time, 29 states faced a total of more than $48 billion in combined shortfalls.

In general, states closed these budget gaps through some combination of spending cuts, use of reserves, or revenue increases when they adopted a fiscal year 2009 budget.

The states' fiscal problems are likely to continue for some time. At least 28 states have looked further ahead and prepared projections of revenues and/or spending for fiscal year 2010 and beyond that foresee continued fiscal distress. These 28 states include Alabama, Arizona, California, Connecticut, Delaware, Florida, Hawaii, Idaho, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oregon, Rhode Island, South Dakota, Vermont, Virginia, Washington, and Wisconsin. These gaps total more than $60 billion — 16 percent of budgets — for the 21 states that have estimated the size of these gaps.

Moreover, this recession is more severe than the last recession, and thus state fiscal problems are likely to be worse. For instance, unemployment, which peaked after the last recession at 6.3 percent, has already hit 6.7 percent, and many economists expect it to rise much further, which will reduce state income taxes and increase demand for Medicaid and other services. And with consumers' reduced access to home equity loans and other sources of credit, sales taxes are also likely to fall more steeply than they did in the last recession. These factors suggest that state budget gaps will be larger than in the last recession. Based on past experience and the depth of this recession it appears likely that all but a handful of states will face shortfalls in fiscal year 2010 and these deficits will end up totaling over $100 billion.

In addition, it may be particularly difficult for states to recover from the current fiscal situation, suggesting that there will be multi-year fiscal distress. Housing markets may be slow to fully recover; the decline in housing markets has already depressed consumption and sales taxes as people refrain from buying furniture, appliances, construction materials, and the like. Property tax revenues are also beginning to be affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.

TABLE 1:
STATES WITH MID-YEAR FY2009 BUDGET GAPS

Size of Gap

Percent of FY2009 General Fund

Alabama

$458 million

5.5%

Arizona

$1.2 billion

11.9%

California

$8.4 billion

8.3%

Colorado

$99 million

1.3%

Connecticut

$392 million

2.3%

District of Columbia

$131 million

2.1%

Delaware

$152 million

4.2%

Florida

$2.1 billion

8.2%

Georgia

$2.5 billion

11.7%

Hawaii

$232 million

4.0%

Idaho

$131 million

4.4%

Illinois

$2.0 billion

7.0%

Kansas

$137 million

2.1%

Kentucky

$456 million

4.9%

Maine

$140 million

4.6%

Maryland

$513 million

3.4%

Massachusetts

$1.4 billion

5.0%

Minnesota

$426 million

2.5%

Mississippi

$24 million

0.5%

Missouri

$342 million

3.8%

Nevada

$536 million

7.3%

New Hampshire

$50 million

1.6%

New Jersey

$1.2 billion

3.7%

New Mexico

$253 million

4.2%

New York

$1.5 billion

2.7%

North Carolina

$800 million

3.7%

Ohio

$1.2 billion

4.2%

Oregon

$142 million

2.1%

Pennsylvania

$565 million

2.0%

Rhode Island

$372 million

11.4%

South Carolina

$554 million

8.1%

South Dakota

$27 million

2.2%

Tennessee

$700 million

6.2%

Utah

$354 million

5.9%

Vermont

$63 million

5.2%

Virginia

$974 million

5.7%

Washington

$413 million

2.7%

Wisconsin

$346 million

2.5%

TOTAL

$31.2 billion

7.2%

Note: An entry of “DK” in Size of Gap means that an estimate of the size of the projected gap in that state is not yet available.

TABLE 2:
STATES WITH PROJECTED FY2010 BUDGET GAPS

Size of Gap

Percent of FY2009 General Fund

Alabama

DK

Arizona

$2.2 billion

21.9%

California

$19.5 billion

19.3%

Connecticut

$2.5 billion

14.5%

Delaware

$304 million

8.3%

Florida

$5.6 billion

21.9%

Hawaii

$682 million

11.9%

Idaho

DK

Kansas

$959 million

15.0%

Louisiana

DK

Maine

$177 million

5.8%

Maryland

$1.3 billion

8.8%

Minnesota

$2.5 billion

14.7%

Mississippi

$87 million

1.7%

Missouri

DK

Nebraska

$152 million

4.3%

Nevada

DK

New Mexico

DK

New York

$12.5 billion

22.2%

North Carolina

$2.7 billion

12.5%

Ohio

$2.0 billion

7.1%

Oregon

DK

Rhode Island

$450 million

13.7%

South Dakota

$32 million

2.7%

Vermont

$94 million

7.8%

Virginia

$1.8 billion

10.6%

Washington

$2.3 billion

15.4%

Wisconsin

$2.9 billion

20.5%

TOTAL

$60.8 billion

16.3%

Note: An entry of “DK” in Size of Gap means that an estimate of the size of the projected gap in that state is not yet available.

Although fiscal year 2010 does not start until July 2009 in most states, the effects of these upcoming problems are likely to be felt sooner. For example, the governor of New York called legislators into a special session in August to make budget cuts designed to reduce projected fiscal year 2010 budget gaps and Maryland has cut spending this year in part to address projected gaps for the next year.

The vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can further slow a state' s economy during a downturn and contribute to the further slowing of the national economy, as well.

Some states have not been affected by the economic downturn but the number is dwindling. There are a number of reasons why. Some mineral-rich states — such as New Mexico, Alaska, and Montana — saw revenue growth as a result of high oil prices. However, the recent decline in oil prices has begun to affect revenues in some of these states. The economies of a handful of other states have so far been less affected by the national economic problems.

In states facing budget gaps, the consequences sometimes are severe — for residents as well as the economy. Unlike the federal government, states cannot run deficits when the economy turns down; they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets. As a new fiscal year begins in most states, budget difficulties are leading some 25 states to reduce services to their residents, including some of their most vulnerable families and individuals.

For example, at least 17 states have implemented or are considering cuts that will affect low-income children' s or families' eligibility for health insurance or reduce their access to health care services. Programs for the elderly and disabled are also being cut. At least 15 states are cutting medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services.

At least 16 states are cutting or proposing to cut K-12 and early education; several of them are also reducing access to child care and early education, and at least 21 states have implemented or proposed cuts to public colleges and universities.

In addition, at least 20 states have proposed or implemented reductions to their state workforce. Workforce reductions often result in reduced access to services residents need. They also add to states' woes by contracting the state economy.

If revenue declines persist as expected in many states, additional budget cuts are likely. Budget cuts often are more severe in the second year of a state fiscal crisis, after reserves have been largely depleted and thus are no longer an option for closing deficits. The experience of the last recession is instructive as to what kinds of actions states may take. Between 2002 and 2004 states reduced services significantly. For example, in the last recession, some 34 states cut eligibility for public health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited access to child care. In addition, 34 states cut real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.

Expenditure cuts and tax increases are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy. Tax increases also remove demand from the economy by reducing the amount of money people have to spend.

The federal government — which can run deficits — can provide assistance to states and localities to avert these “pro-cyclical” actions.

States Have Restrained Spending and Accumulated Rainy Day Funds

Many states have never fully recovered from the fiscal crisis in the early part of the decade. This fact heightens the potential impact on public services of the deficits states are now projecting.

State expenditures fell sharply relative to the economy during the 2001 recession, and for all states combined they remain below the FY2001 level. In 18 states, general fund spending for FY2008 — six years into the economic recovery — remained below pre-recession levels as a share of the gross domestic product.

In a number of states the reductions made during the downturn in education, higher education, health coverage, and child care remain in effect. These important public services were suffering even as states turned to budget cuts to close the new budget gaps. Spending as a share of the economy declined in FY2008 and is projected to decline further in FY2009.

One way states can avoid making deep reductions in services during a recession is to build up rainy day funds and other reserves. At the end of FY2006, state reserves — general fund balances and rainy day funds — totaled 11.5 percent of annual state spending. Reserves can be particularly important to help states adjust in the early months of a fiscal crisis, but generally are not sufficient to avert the need for substantial budget cuts or tax increases.

Federal Assistance Needed

Federal assistance can lessen the extent to which states take pro-cyclical actions that can further harm the economy. In the recession in the early part of this decade, the federal government provided $20 billion in fiscal relief in a package enacted in 2003. There were two types of assistance to states: 1) a temporary increase in the federal share of the Medicaid program; and 2) general grants to states, based on population. Each part was for $10 billion. The increased Medicaid match averted even deeper cuts in public health insurance than actually occurred, while the general grants helped prevent cuts in a wide variety of other critical services. The major problem with that assistance was that it was enacted many months after the beginning of the recession, so it was less effective than it could have been in preventing state actions that deepened the economic downturn. The federal government should consider aiding states earlier, rather than waiting until the downturn is nearly over.

Moreover, it seems increasingly likely that this recession will be more severe than the last recession, and thus state fiscal problems may be worse. For instance, unemployment, which peaked after the last recession at 6.3 percent, has already hit 6.7 percent, and many economists expect it to rise much further, which will reduce state income taxes and increase demand for Medicaid and other services. And with consumers' reduced access to home equity loans and other sources of credit, sales taxes are also likely to fall more steeply than they did in the last recession. These factors suggest that a new round of fiscal relief should be larger than was enacted in 2003.

TABLE 3:
SIZE OF TOTAL FY2009 BUDGET GAPS

Gap before budget was adopted

Additional mid-year gap

Total

Total Gap as Percent of FY2009 General Fund

Alabama

$784 million

$458 million

$1.2 billion

15.0%

Arizona1

$1.9 billion

$1.2 billion

$3.1 billion

30.8%

Arkansas

$107 million

$107 million

2.4%

California

$22.2 billion

$8.4 billion

$30.6 billion

30.3%

Colorado

$99 million

$99 million

1.3%

Connecticut

$150 million

$392 million

$542 million

3.2%

Delaware

$217 million

$152 million

$369 million

10.1%

District of Columbia

$96 million

$131 million

$227 million

3.6%

Florida

$3.4 billion

$2.1 billion

$5.5 billion

21.5%

Georgia1

$245 million

$2.5 billion

$2.7 billion

12.9%

Hawaii

$232 million

$232 million

4.0%

Idaho

$131 million

$131 million

4.4%

Illinois

$1.8 billion

$2.0 billion

$3.8 billion

13.4%

Iowa

$350 million

$350 million

5.5%

Kansas

$137 million

$137 million

2.1%

Kentucky

$266 million

$456 million

$722 million

7.8%

Maine

$124 million

$140 million

$265 million

8.6%

Maryland

$808 million

$513 million

$1.3 billion

8.8%

Massachusetts

$1.2 billion

$1.4 billion

$2.6 billion

9.2%

Michigan

$472 million

$472 million

4.8%

Minnesota

$935 million

$426 million

$ 1.4 billion

7.9%

Mississippi1

$90 million

$24 million

$114 million

2.2%

Missouri

$342 million

$342 million

3.8%

Nevada

$898 million

$536 million

$1.4 billion

19.6%

New Hampshire

$200 million

$50 million

$250 million

8.0%

New Jersey1

$2.5 billion

$1.2 billion

$3.7 billion

11.4%

New Mexico

$253 million

$253 million

4.2%

New York

$4.9 billion

$1.5 billion

$6.4 billion

11.4%

North Carolina

$800 million

$800 million

3.7%

Ohio1

$733 million

$1.2 billion

$1.9 billion

6.8%

Oklahoma

$114 million

$114 million

1.7%

Oregon

$142 million

$142 million

2.1%

Pennsylvania

$565 million

$565 million

2.0%

Rhode Island

$430 million

$372 million

$802 million

24.5%

South Carolina

$250 million

$554 million

$804 million

11.7%

South Dakota

$27 million

$27 million

2.2%

Tennessee1

$468 million

$700 million

$1.2 billion

10.4%

Utah

$354 million

$354 million

5.9%

Vermont

$59 million

$63 million

$122 million

10.0%

Virginia

$1.2 billion

$974 million

$2.2 billion

12.8%

Washington

$413 million

$413 million

2.7%

Wisconsin

$652 million

$346 million

$998 million

7.1%

TOTAL

$47.6 billion

$31.2 billion

$78.8 billion

12.9%

1Only the low end of the estimated FY09 gap for these states — ones that provided a range of estimates — is shown in this table. For more detail see 29 States Faced Total Budget Shortfall of At Least $48 billion in 2009 available at http://www.cbpp.org/1-15-08sfp.htm.



My reaction: Points to take away from article above:

1) The vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states must close to budget shortfalls by either drawing on reserves, cutting expenditures, or raising taxes.

2) States have already begun drawing down reserves, and the remaining reserves are not sufficient to weather a significant economic downturn. Also, Many states have no reserves and never fully recovered from the fiscal crisis in the early part of the decade.

3) State budget cuts often are more severe in the second year of a state fiscal crisis, after reserves have been largely depleted.

4) When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. These cuts, like taxes, drain an enormous amount of money out of the economy.

5) Expenditure cuts and tax increases are problematic policies that cause economic downturns to deepen. They both leave business and individuals with less cash and thereby remove demand from the economy, causing state and federal GDP to shrink.

6) The federal government will eventually be forced to step in and offer states some form of assistance to prevent economic collapses and humanitarian disasters. This means more bailouts, and these bailouts will only marginally help state deal with their enormous budget shortfalls.

7) All the state budget troubles also apply to local governments. In fact, local governments with their reliance on property taxes and crushing pension obligations are in an even worse financial position.

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0 Responses to State Budget Troubles Worsen

  1. Anonymous says:

    You have just outlined the next shoe to drop.

    Of course their favorite uncle is waiting in the wings with freshly minted money (smell the mint!).

    California is a disaster economically. And with an overwhelming democratic majority, don't expect any fiscal discipline. I anticipate lots of begging from "Arny", to save the
    8th largest economy in the world from bankruptcy.

    Ahhhhh, the moral hazards. At the end of this, you wont even need to report for a job because you will get your check for just staying home and not rioting, of course that check will buy you a slice of bread and pay your cable bill with maybe a little left over for an ever bigger big screen TV and maybe a membership in a online virtual reality community, one not beholden unto economic reality (ie.socialism).

    Its bread and circus time folks. Enjoy the diversions.

  2. stella says:

    I got a grant from the federal government for $12,000 in financial aid, see how you can get one also at
    http://couponredeemer.com/federalgrants/

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