Stateline Story

Budget Deadline Looms Large in 10 States

The clock is ticking in 10 states that have not yet adopted budgets for the fiscal year that begins July 1, with an eleventh-hour showdown threatening a partial government shutdown in Minnesota.

Round-the-clock negotiations likely will allow most of the states to make the deadline, but not all of them. "There probably will be some states that go into the new fiscal year without a budget in place," said Arturo Perez, a fiscal analyst for the National Conference of State Legislatures (NCSL). Of the 46 states where fiscal 2006 starts July 1, 10 had yet to adopt budgets with a week to go. They are California, Delaware, Minnesota, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, Rhode Island and Wisconsin.

Exploding Medicaid costs are straining state budgets across the country and were a primary cause of 2006 budget gaps that legislators faced in roughly half of the states this year, according to an April 14 report from the NCSL.

The consequences of entering the fiscal year without a budget vary from state to state. In 12 states, all or part of the government can keep operating. In Wisconsin, for example, state agencies would continue functioning at 2005 budget levels on a month-to-month basis. Eleven states use temporary appropriations legislation -- commonly referred to as continuing resolutions -- to keep government going for specified periods of time.

The stakes are much higher in at least 20 states that direct state government to shut down if a budget isn't in place when the new fiscal year begins. Of the 10 states that have July 1 fiscal-year start dates and no budgets, Minnesota is the only one where there is no mechanism to keep the government functioning.

Minnesota lawmakers are engaged in a staring contest of sorts -- and if neither side blinks soon, the government will shut down when the clock strikes midnight June 30.

The Gopher State, which faces a projected $466 million budget shortfall, is among the 26 states where lawmakers had to overcome budget gaps to craft their 2006 spending plans.

So far, lawmakers have been unable to reconcile budget proposals favored by Republican Gov. Tim Pawlenty and the Republican-controlled House with a plan put forth by the Senate, which is controlled by the state's Democratic-Farmer-Labor (DFL) party. Hundreds of millions of dollars separate the two plans. Proposed tax increases and Medicaid cuts are the primary sticking points.

"Nobody knows exactly what the outcome might be in Minnesota," Perez said.

The last time a state government shut down was in 2002, when Tennessee lawmakers' budget brinksmanship went bust.For three days, classes stopped at public universities, driver's licenses weren't issued, and road construction ceased, but many essential services, such as prison operations and highway patrols, continued uninterrupted.

The Minnesota Legislature and then-Gov. Jesse Ventura (I) came within 21 hours of a shutdown in 2001 before the budget stalemate was broken.

"This is deja vu for them," Perez said of the Minnesota lawmakers.

While protracted budget battles rage in states such as Minnesota, Pennsylvania and New Jersey, fiscal negotiations in other states -- such as New York and Kentucky -- were unusually timely this year.

For the first time in 20 years, lawmakers in Albany, N.Y., delivered a budget before the fiscal year began April 1. In Kentucky, lawmakers never passed a budget last year, but Gov. Ernie Fletcher's (R) 2006 proposal sailed through the Legislature this year largely unscathed.

In addition to New York, the three states where the fiscal year does not begin July 1 are Texas (Sept. 1) and Alabama and Michigan (Oct. 1). Alabama and Michigan also have not finished their budgets, although Alabama has adopted the education portion of its budget. Texas lawmakers passed that state's budget in May, although a special session is now under way to craft a school-financing plan, after Gov. Rick Perry (R) vetoed the education portion of the budget.

All states have an incentive to meet their budgets deadlines --keeping legislators in the state capitol is expensive. Consistent failure to pass a budget on time also can jeopardize a state's credit rating, forcing it to pay a higher interest rate to borrow money. California, which has often failed to pass its budget on time, currently has the lowest credit rating of any state in the past 10 years.

A June 14 report from the Nelson A. Rockefeller Institute of Government indicated that state revenues increased 11.5 percent before inflation adjustment in the first quarter of 2005, compared to the same period in 2004, the strongest first-quarter growth in states' revenues since at least 1991. Part of the increase was due to changes in state tax laws, according to the report.

Perez said it too early to comprehensively assess the impact the revenue upswing has had on states' efforts to pass their 2006 budgets. He said many states were able to avoid the deep cuts in services that they have been forced to make since 2001, when the nationwide economic downturn caused state revenues to nosedive.

"The revenue situation has improved for states considerably from the position they were in any of the past three to four years. ... The enhanced revenue picture that's being reported across the country will perhaps allow states to better address their spending priorities," Perez said.

But he added that state revenues represented just one side of the ledger and that rising costs associated with expanding demand for state services such as Medicaid and education could continue to strain state budgets.