A report released today by the Pew Center on the States shows that some of the same pressures that have pushed California toward economic disaster are wreaking havoc in a number of other states, with potentially damaging consequences for the entire country. Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin join California as the 10 most troubled states, according to Pew's analysis, Beyond California: States in Fiscal Peril.
These states' budget troubles can have significant repercussions for their residents: higher taxes or fees; layoffs or furloughs of state workers; longer waits for public services; more crowded classrooms; higher college tuition and less support for the poor or unemployed. They also pose challenges for the nation as a whole. Together, the 10 states account for more than one-third of America's population and economic output. And actions taken by state governments to balance their budgets—such as tax increases and drastic spending cuts—can slow down the country's recovery.
"A challenging mix of economic, political and money-management factors have pushed California to the brink of insolvency. But while California often takes the spotlight, other states are facing hardships just as daunting," said Susan Urahn, managing director of the Pew Center on the States. "Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers."
In the report, Pew's researchers identified factors that have contributed significantly to California's difficulties, then determined the degree to which other states are experiencing the same challenges. These factors are: (1) loss of state revenues; (2) the relative size of budget gaps; (3) increasing joblessness; (4) high foreclosure rates; (5) legal obstacles to balanced budgets—specifically, a supermajority requirement for tax increases or budget bills and (6) poor money-management practices.
Pew scored all 50 states using the best available data as of July 31, 2009. The snapshot captures an important juncture: the first and second quarters of 2009, the pressure point for governors and legislatures in the throes of crafting their budgets for fiscal year 2010 (which began on July 1 in all but four states).
Each of the factors highlighted in Pew's analysis is a warning sign, and collectively they paint a picture of how states are faring in comparison with California. The report is not a comprehensive diagnosis of states' fiscal health, which is also affected by issues such as demographics, debt burden and public pension liabilities. It is an important tool to begin to understand why some states are suffering more acutely from this recession than others.
While the rest of the states share important characteristics with California, they may not be destined to follow in the Golden State's footsteps. Some of these states already have responded aggressively to their budget crisis, although it is too soon to tell whether their actions will put them on solid fiscal footing.
"The 10 states are hardly the only ones at risk in this time of record-setting revenue drops, high unemployment and far-flung fallout from the housing bust and credit crisis. Virtually all states have been stressed by the downturn," Urahn said. "We expect that when state lawmakers next spring turn to crafting their new budgets for 2011, many will confront an even tougher set of challenges. States already have made significant cuts, revenues continue to drop, and stimulus funds will be running out."
The report identifies threads that cut across the 10 states and could point to vulnerabilities in others as they try to navigate their way out of the fiscal crisis:
States' fiscal situations are widely expected to get worse even if the national economy starts to recover. At the end of 2010, federal stimulus money that helped states meet some of their expenses begins to run out. Plus, states historically have their worst years shortly after a national recession ends, when they are coping with higher Medicaid and other safety-net expenses and when revenues lag because of stubborn unemployment.
The Pew Center on the States is pursuing additional research that will take a closer look at states under fiscal stress and policy options that might be most effective in helping them find their footing. For now, this report shows California is not the only state whose fiscal health hangs in the balance.
The Pew Center on the States, a division of The Pew Charitable Trusts, identifies and advances effective policy approaches to critical issues facing states. The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life.