 States continue to see declining revenues, triggering a new mid-year gap in FY 2010 budgets totaling $34 billion; already looming for FY 2011, a $97 billion budget shortfall, only partly addressed, according to a new update from the Center on Budget and Policy Priorities.
New, mid-year budget gaps for FY 2010 (which began for most states last July 1) are led by a high of 20.5 percent of General Fund spending for Arizona and are more than 10 percent of General Fund spending in the following states: Illinois (14.3 percent), Rhode Island (13 percent), Kentucky (12.9 percent), New Mexico (11.8 percent), Virginia (11.1 percent), and Hawaii (10.4 percent). (States may have addressed some of these gaps by the December 23 publication date of the CBPP report.)
When considering the $193 billion shortfall of states’ revenues versus spending for the entire FY 2010 (initial and mid-year), the states that have been rocked by the most challenging times, in terms of having to scramble to fill the largest holes as a percentage of general fund spending are:
• California, 56.2 percent ($51.8 billion)
• Arizona, 53 percent ($5.2 billion)
• Illinois, 40.9 percent ($14.3 billion)
• Nevada, 40 percent ($1.2 billion)
• New York, 38 percent ($21 billion)
• Rhode Island, 32.2 percent ($990 million)
• New Jersey, 31.3 percent ($9.2 billion)
• Kansas, 30 percent ($1.8 billion)
• Alaska, 30 percent ($1.3 billion)
Consequences of Budget Shortfalls
Certainly, budget gaps have major ramifications for the residents of these states in terms of reduction of services and increased taxes. Approximately 43 states have cut services and over 30 have raised taxes, some quite significantly, which can further erode demand and drag down the recovery outlook even further, the CBPP notes.
Economists have begun to see hopeful signs in the national outlook, such as a slowdown in job loss and a rise in industrial production and building permits, reported recently. A good resource for a quick snapshot of national economic indicators is the Hudson Institute’s Economic Report, which presents a graph and key highlights of each indicator. Click here.
But, states’ continued difficulties could slow national economic recovery prospects. Federal assistance under the American Recovery and Reinvestment Act, totaling about $140 billion over two-and-a-half years has helped lessen the severity of states’ suffering; extension of aid passed the current expiration of December 2010 should be taken relatively soon to enable states to better prepare FY 2011 budgets, the CBPP recommends.
The recovery outlook for states can be dimmed considerably by the growth of unfunded mandates – the federal government undertaking policy initiatives that mandate actions by state and local governments and the private sector, without providing the federal dollars to cover costs incurred by these entities.
The Congressional Budget Office determined that the Senate version of healthcare reform legislation, approved by the Senate this morning and slated for reconciliation with the House bill after the Christmas break, increased these burdens and greatly exceed the threshold set by the Unfunded Mandates Reform Act of 1995 (see AOH, December 22, 2009, “Healthcare Reform: Next Steps”).
Not Really Solving the Problem
The propensity of policy makers to shift fiscal burdens from one layer of government to another and continually be in a mode of fighting fires as they seek to plug the next budget gaps coming through the revolving door suggests to some analysts that the core of these problems is not being addressed directly. In turn, the short-term nature of budget “solutions” and policy making creates an atmosphere of uncertainty in which business sectors find it difficult to plan for expansion and growth. Instead, there can be a tendency to act with caution.
And this is exactly what Americans are seeing in persistent layoffs even at (or, perhaps, especially at) large, profitable companies, according to a new assessment by the Economic Policy Institute.
Andrea Orr notes that these companies are seeking greater returns for shareholders and a more certain prospect of increased earnings by laying off mass numbers of employees. Some of the examples of profitable companies that have aggressively laid off workers that she highlights are Microsoft, Wal-Mart, IBM, Aetna, Danaher Corp., Verizon, Monsanto, and Phillip Morris.
Job losses, in turn, feed into reduced consumer demand/spending, reduced revenue to states, possibility increase in foreclosures, heightened under-employment and potentially more demand on state services.
Not only does employer caution amid policy uncertainty complicate jobs recovery, but historically, jobs can be slow to rebound.Michael Mussa, a senior fellow at the Peterson Institute for International Economics notes that jobs recovery in the Clinton era was slower and more tepid in the Clinton era. Much quicker was the Reagan recovery, he notes, when Gross Domestic Product grew by 6 percent an unemployment dropped by about 2.5 percent in the first year.
The ability of policy makers to clearly articulate their agendas and avoid shifting burdens elsewhere (such as through unfunded mandates) are not the only factors that can aid recovery prospects.
There needs to be a lot more “biting the bullet” to bring spending and revenues in better balance, greater diversification of economies and revenue sources, and more long-term planning, notes a recent Pew on the States report, “Beyond California: States in Fiscal Peril.”
This Pew report looked specifically at nine states, other than California, who are suffering most grievously in the current recession. The report notes that these states share problems that can be described in four themes, whose effects were very much in motion long before the recession hit:
1) Unbalanced economy – over-dependence on one industry or company/companies
2) Revenues and expenditures are out of alignment
3) Lawmakers are restricted in their ability to raise taxes or cut spending
4) Not making long-term decisions – putting off tough decisions until it is too late
“Many economists are optimistic that America’s Great Recession may be turning the corner. States, however, are not celebrating. Plagued by record-setting revenue losses, the housing bust and credit crisis, high unemployment and a host of other challenges, states have struggled through nearly two years of budgetary pain—and are bracing for more.
California’s fiscal problems are in a league of their own—but the Golden State is hardly alone,” the report notes.
California and the nine states analyzed as having similarly persistent fiscal problems (Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin) account for more than one-third of U.S. population and economic output, Pew Center on the States said, which suggests why the ill-fortunes of these states also suggest negative reverberations on the national scale.
“Our analysis is not a comprehensive diagnosis of states’ fiscal health, which also is affected by issues such as demographics, debt burden and public pension liabilities. But each of the six factors we highlight is a warning sign, and collectively they allow one way of measuring how states are faring in comparison with California,” the report states. (Data was best available as of July 31, 2009.)
Change in Revenue Size of Budget Gap Change in Jobless Rate (2Q 08 to 09)
U.S. -11.7% 17.7% Up 4.4
CA -16.2% 49.3% Up 4.6
AZ -16.5% 41.1% Up 3.0
RI -12.5% 19.2% Up 4.5
MI -16.5% 12.0% Up 6.0
OR -19.0% 14.5% Up 6.4
NV 1.5% 37.8% Up 5.2
FL -11.5% 22.8% Up 4.4
NJ -15.8% 29.9% Up 3.7
IL -10.9 % 47.3% Up 3.5
WI -11.2% 23.2% Up 4.4
Foreclosure Rate (New; 1Q) Super Majority Required Score (30 is worst)
U.S. 1.37% YES 17
CA 2.02% YES 30
AZ 2.42% YES 28
RI 1.50% YES 28
MI 1.47% YES 27
OR .86% YES 26
NV 3.12% YES 26
FL 2.72% YES 25
NJ 1.18% NO 23
IL 1.44% NO 22
WI .96% NO 22
Both California and the other states studied have been plagued by deeply entrenched problems long before the recession occurred; these problems, according to the report, include voter constraints that make it more difficult for lawmakers to approve tax increases or budget cuts, increased partisan division, failure to fully recover from prior recessions, spending and revenues being severely out of balance, and lack of sufficient diversification in economic components and revenue sources.
About California, the report highlights…
• California had problems with budget deficits even before the current recession
• California had the largest budget shortfall of any state in the recession in the early 2000s
• California’s foreclosure rate is worse than the national average – the fourth highest of any state
• From mid-year 2008 to mid-year 2009, California’s unemployment rate increased to a level that it was the 8th worst in the nation
• California’s revenues fell by one-sixth from 1Q 2008 to 1Q 2009
• California’s FY 2010 – both total and as a share of GF was the worst in the nation
• The ability of California lawmakers to fix budget problems is constrained by voter-imposed restrictions including the requirement that all budgets and tax increases be approved by a two-thirds majority of the Legislature
• Due to partisan differences, the Republican governor and the Democrat-controlled Legislature could not agree and put the budget cuts to the voters, who rejected them, leaving California with a greater than $26 billion budget gap
• Since the 1990s, California has increased spending at a faster rate than inflation or population growth
About other states, the report highlights…
Arizona’s lawmakers relied on one-time fixes instead of making long-term changes to address the budget.
As in California, lawmakers are hamstrung by voter restrictions. The economy benefited from growth and tax cuts in the 1990s.
Rhode Island is plagued with one of the highest unemployment rates and one of the highest foreclosure rates.
The state has high taxes, a lack of high-tech jobs, persistent deficits and poor management of the state’s budget.
Michigan has obvious problems with the auto industry and needed bailouts, but also Michigan never really emerged from the 2001 recession.
Some of Nevada’s tax laws are written into the constitution and therefore not easily changed. Revenues have dropped for two consecutive years due to the gaming industry and sales tax revenue plunges. This is a record decline.
Oregon voters rejected a state sales tax nine times and now are at the mercy of volatile personal and corporate income taxes. Voters have the final say on a package of $733 million tax increases and they usually reject proposed tax increases.
Florida’s population is shrinking and the state is trying to raise new revenue but battling continued budget gaps.
New Jersey is trying to recover from years of mismanagement. Pensions are notoriously underfunded.
Illinois is underwater with Medicaid bills and pension obligations. The state relies heavily on borrowing and has one of the worst budget gaps in the United States.
Wisconsin’s economy is hurt by major problems in manufacturing and unemployment is high. Wisconsin has a history of budget shortfalls and was poorly situated for weathering the recession storm.
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