States Grapple With Worst Budget Crises Since 1930s
Policy + Politics

States Grapple With Worst Budget Crises Since 1930s

From Arizona to New Jersey, states across the country are cutting key programs

WASHINGTON – For state governments around the country, the fiscal bloodbath is just beginning.

In Arizona, which mortgaged the state capitol last year to raise extra cash, the governor is proposing to slash health care for impoverished children and adults, close most state parks and freeze education spending at levels in 2006.

In California, thousands of students, parents and teachers recently staged protests against plans for teacher layoffs and a 32-percent tuition hike at state universities.

In Illinois, which borrowed $3.4 billion last year to make mandatory payments to the state pension fund, the governor is pushing for deep cuts in spending and an increase in the income tax.

Even though the economy has begun a shaky recovery, state governments around the country are grappling with their worst budget crises since the 1930s.

State tax revenues plunged at double-digit rates for most of 2009 and are expected to keep declining for much of this year. At the same time, the cost of safety-net programs like Medicaid have soared and federal stimulus money is running out.

Unlike last year, when President Obama’s stimulus bill pumped more than $100 billion into state coffers last year, most of the federal assistance will be gone by the end of this year.

"You can argue about how good or bad the stewardship has been," said David J. Rosen, director of New Jersey’s nonpartisan Office of Legislative Services. "But in one sense, it doesn’t matter. Everything has been overwhelmed by the economic collapse."

Unlike Congress, which can authorize as much borrowing as it wants, almost all states are legally obligated to balance their budgets. Most already have used up their "rainy day" reserves as well as quick-fix maneuvers like rolling over unused money to the next fiscal year.

The Center on Budget and Policy Priorities, a liberal think-tank, estimates that states face an aggregate shortfall of $180 billion for the coming year. In some states, the budget gap is more than 30 percent.

Under heavy pressure from Republican and Democratic governors alike, Congress appears set to alleviate some of the pain. On Wednesday, the Senate passed an about $140 billion bill that includes extensions to the federal government’s extra contributions to state Medicaid and unemployment benefits.

Even so, state budget officials across the country face acute problems. State tax revenues have plunged in all but a handful of states, and are not expected to rebound to pre-crisis levels for years.

"This recession has pillaged what took years to build, and years will pass before we fully undo its devastating effects," declared Arizona Governor Jan Brewer, a Republican, as she proposed drastic budget cuts and a three-year hike in the sales tax in January.

The worst shortfalls are in states, like Arizona and California, that were both at the epicenter of the housing collapse and have deeply-ingrained resistance to higher taxes.

In both California and Arizona, any tax increase generally takes a two-thirds majority vote in both houses of the state legislature – an almost impossible hurdle. As a result, both states are relying heavily on spending cuts.

California Governor Arnold Schwarzenegger is proposing to terminate Medicaid benefits for about 250,000 adults and about 1 million children. Arizona’s Governor Brewer, is proposing to cut 310,000 adults from Medicaid and simply eliminate the state’s insurance program for children from low-income families.

In Arizona, tax revenues dropped 36 percent from 2007 through 2009. Unemployment has doubled to about 9 percent, and job creation is slower in Arizona than in almost any other state. As a result, retail sales remain 20 percent below their level before the crisis.

The state’s problems have been compounded by its tax-cutting zeal when times were good. Between a corporate tax cut in 2005 and personal income tax cuts in 2006, Arizona’s tax rates are among the lowest in the country and its annual revenues are about $455 million lower than they would be otherwise.

In a sign of how desperate Arizona officials were last year, the state raised $735 million by mortgaging the state capitol and other buildings. State officials are now planning to close 13 out of 27 state parks, on top of the four they have already closed.

The real cuts are coming in the 2011 fiscal year, which starts on July 1. Governor Brewer faces a projected shortfall of $3.2 billion, or a budget gap of about 33 percent.

To raise extra revenue, she has asked voters to approve a three-year hike in the state sales tax that would yield an estimated $1 billion per year.

In addition, the governor has proposed about $2 billion in annual spending cuts. The biggest cuts would be in Medicaid and KidsCare, Arizona’s health insurance program for children. Beyond that, she is proposing to cut state spending on universities as well as elementary and secondary schools; to eliminate the Department of Juvenile Corrections; and to eliminate cash assistance to about 10,000 impoverished families.

"We’re basically closing up the shop," said Dana Wolfe Naimark, president of the Children’s Action Alliance, a community advocacy group in Phoenix.

Political constraints make the budget crunch even more difficult. If voters do not approve the tax increase, which is unlikely, the governor will have to muster two-thirds of the vote in both houses of the legislature. Arizona’s two Republican senators, John McCain and Jon Kyl, have both come out against the tax proposal.

Similarly, New Jersey faces a mammoth budget gap of at least $8 billion next year. But the newly-elected Republican governor, Chris Christie, has vowed to keep tax increases off the table.

New Jersey starts the new fiscal year on July 1 by carrying over a $2 billion deficit from last year. Budget officials expect to lose an additional $2 billion in tax revenues, half of that because of the slumping economy and half because a one-year "millionaire’s tax" is set to expire. Meanwhile, the state will lose $2 billion in federal stimulus money, and it owes as much as $3 billion to the state employee’s depressed pension fund.

"Looking at past budget crises, the solutions have been a combination of spending cuts and revenue enhancements," said Mr. Rosen, the legislature’s budget analyst. “In proposing to solve this entirely by spending cuts, the governor has given himself a much more difficult burden."

Only two states, Montana and North Dakota, appear to have avoided a budget shortfall so far. Even states that initially seemed in good shape have been battered.

"What’s striking is that this was originally a problem in a few states, but now it has spread to almost all states," said Nicholas Johnson, an analyst at the Center on Budget and Policy Priorities in Washington.

For many states, the calamities of the present have collided with unresolved problems of the past.

One of the biggest problems has been the mounting volume of unfunded pension liabilities. The Civic Federation, a nonprofit and nonpartisan think-tank, estimates that Illinois faces a total unfunded pension liability of $62.4 billion. 

"The state of Illinois has been spending more than it received for decades," said Governor Patrick Quinn on Wednesday, as he unveiled proposals to cut spending by $2 billion, increase personal income taxes by $3 billion and implement a program of "strategic borrowing."

State officials and budget analysts say it will be years before budgets can return to normal. After the short and comparatively mild recession of 2001, some states continued to suffer shortfalls as late as 2005.

Given the much higher unemployment in this recession, the rebound is likely to take even longer.