After a four-year spending splurge, many state governments are facing big budget gaps because of plunging home prices, declining manufacturing output and rising unemployment.
A report by the National Governors Association (NGA) says the pressure to cap spending probably will intensify in the years ahead. These deteriorating economic trends could contribute to huge budget shortfalls in fiscal 2009, requiring states to all but freeze spending growth, according to the association’s report.
States are pursuing many strategies to cope with the impending shortfalls. In 2009, tuition at state universities in Virginia, California and Alabama will increase by about 10 percent. Florida and California will be reducing state aid to school districts.
To achieve long-term savings, Tennessee “used one-time money from a reserve fund to finance voluntary buyouts for 2,000 state employees,” said Lola Potter of the Department of Finance and Administration.
“Ohio has been challenged by the downturn in the national economy,” said Keith Dailey, press secretary for Gov. Ted Strickland, a Democrat. The $733 million in cuts that the governor instructed state agencies to implement required “real sacrifices, including job reductions and the closing of two mental health facilities,” Mr. Dailey said.
Ohio has kept its $1.1 billion rainy-day fund in reserve in case the slowdown turns into a recession, he said.
Budget-reduction measures under consideration include early-release programs for nonviolent state prisoners in California, Kentucky and Mississippi.
Rhode Island has addressed a nearly $450 million shortfall by reducing personnel costs, cutting payments to cities and towns and ending an energy-assistance program for the poor. “The state will spend less in 2009 than was enacted in 2008,” said Jeff Neal, press secretary for Gov. Donald L. Carcieri, a Republican. “It’s the first time in recent history that’s happened.”
To make major dents in California’s projected deficit of more than $20 billion, Gov. Arnold Schwarzenegger, a Republican, has proposed borrowing $15 billion against future profits from an expanded state lottery and deeply cutting the state’s Medi-Cal health insurance program for the poor.
Altogether, 18 states reported that they intended to spend less in 2009 than in 2008. Still, the situation is “not as bad for states as it was post-9/11,” Mr. Pattison said, but he is “very concerned about the future.”
“The future does not look very good,” said Iris J. Lav of the liberal Center on Budget and Policy Priorities (CBPP). States are “in for a hard time.”
The center estimated earlier this year that states confronted cumulative budget shortfalls of nearly $50 billion for 2009. Unlike the federal government, states generally are required to balance their budgets on an annual basis. “A nominal 1 percent increase in spending is close to a 2.5 percent cut in buying power,” Ms. Lav said.
The budgetary plight of the states is receiving little sympathy in some circles.
“Maybe it’s time for states to tighten their belts,” said Chris Edwards of the libertarian Cato Institute, who contends that “states are crying, ’Woe is me.’”
Since 1979, state spending from general funds has increased an average of 2 percent a year when adjusted for inflation, the NGA report said.
Citing this three-decade trend, Mr. Edwards said the 2009 spending slowdown represented “a modest adjustment.”
Since fiscal 2008 began, states have enacted $5.2 billion in spending cuts. Mr. Edwards noted that those cuts amounted to 0.7 percent of the nearly $700 billion in general fund expenditures.
The 1 percent growth rate in expenditures for fiscal 2009, which begins July 1 in most states, follows spending jumps of 6.5 percent in 2005, 8.7 percent in 2006, 9.3 percent in 2007 and a projected 5.1 percent in 2008.
In the likely event that 2009 revenue growth will fall below the current estimate of 4.4 percent, pressure will grow to reduce spending and to dip deeper into declining rainy-day funds, as states struggle to address their expanding budget problems.
Rising state Medicaid expenses, which are expected to increase 4.4 percent in 2009, would require spending on other programs to decline if total general fund spending increases by 1 percent or less, said Scott Pattison, executive director of the National Association of State Budget Officers.
During the last recession, 34 states cut eligibility for public health programs, and 23 states reduced eligibility for child care subsidies, according to the CBPP. During the 2002-04 period, the last time states confronted several years in which inflation-adjusted general fund spending declined, 34 states reduced per-pupil aid to school districts, the CBPP reported.
The state fiscal picture isn’t bleak everywhere. There is a “huge disparity between states in how they are performing,” said Raymond C. Scheppach, executive director of the NGA. He said that several states, including California, Florida, Nevada and Arizona, have been “significantly impacted by the housing crisis.” Since mid-2006, home prices have plunged an average of 27 percent in Los Angeles, San Francisco, Miami, Las Vegas, Phoenix, and Tampa, Fla., according to the S&P/Case-Shiller Home Price Indices.
In contrast, up to a dozen states including West Virginia, North Dakota, Montana, Texas and Wyoming were doing “quite well,” Mr. Scheppach said, largely because they benefited from booming agriculture and energy markets. About 30 states were in the middle.
Mr. Scheppach said states face a “three- or four-year slowdown” in revenue. States feel the biggest effects a year or two after national recessions end, he said. The unemployment rate peaked 15 months after the 1990-91 recession and 19 months after the 2001 recession. A peaking unemployment rate is associated with falling personal income-tax revenue, Mr. Scheppach said.
It is not clear whether the U.S. economy has fallen into recession, but the national unemployment rate jumped 0.5 percent in May to 5.5 percent, which is more than a percentage point above the March 2007 rate of 4.4 percent. Noteworthy state unemployment rates for May were: Michigan, 8.5 percent; California, 6.8 percent; Illinois, 6.4 percent; Ohio, 6.3 percent; and Nevada, 6.2 percent. Those rates reflected an average increase of 1.3 percentage points since May 2007.
Although the entire private sector has shed 75,000 jobs since June 2007, state payrolls have grown by 33,000, according to the Bureau of Labor Statistics.
In addition to falling home prices and rising unemployment, state fiscal problems have been compounded by reduced manufacturing output, which in May was 1.6 percent below its July 2007 level, according to the Federal Reserve.
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