Stateline Story

23 States Face Budget Gaps in '09

Like a college student fishing for stray quarters in the sofa cushions, states are tightening their belts, dipping into their rainy day funds and hoping revenues will pick up.

But many states are bracing against a faltering economy they expect to get worse.

Anemic revenue returns forced 16 states to patch nearly $12 billion holes in their current budgets, up from the seven that faced shortfalls last November, while in 23 states, budget gaps totaling at least $26 billion have emerged for their 2009 budgets, according to a new 50-state fiscal survey from the National Conference of State Legislatures. Of these 23 states, four states reported budget gaps as well, but did not provide amounts to NCSL.

The survey, released today (April 25), includes a revenue outlook for next year and a description of the overall fiscal situation in each state.

"Whether or not the national economy is in recession-a subject of ongoing debate-is almost beside the point for some states because their fiscal situations have declined so much that they appear to be in a recession," NCSL concluded.

NCSL's report comes as many state legislatures are working on their 2009 budgets, which for all but four states will kick in July 1. Several states already have wrapped up this year's legislative sessions including Idaho, Maryland, New Mexico, Utah, Virginia, Washington and Wyoming.

Some states have already slashed programs and are trying creative approaches to gin up more revenue. New Jersey made nearly $1 billion in cuts, including under-funding employee pension contributions by 50 percent, and Gov. Jon Corzine (D) has called for no growth in total spending for 2009, a rarity in state budgeting.

Florida had to cut $1 billion during a special session last October to plug a shortfall in its current budget, and the red ink keeps flowing. State lawmakers in Tallahassee April 23 heeded Gov. Charlie Crist's (R) proposal to spend $300 million from its reserves to avoid cutting health-care programs for the needy. Nevada imposed a 4.5-percent across-the-board cut for all agency budgets including K-12 education to close its 2008 budget gap and is looking at another across-the-board reduction for 2009.

Although not mentioned in this report, New York in April balanced its books by hiking the state tax on a pack of cigarettes by $1.25 to $2.75 a pack, making it the highest in the country. The state also became the first to require online retailers, like Amazon that do not have a physical presence in New York, to collect sales taxes on purchases New Yorkers make and remit them to the state. The state figures to collect $50 million from the new requirement.

Deficits are a far greater problem for states, because, unlike the federal government, states must make cuts or even raise taxes to balance their budgets.

Here's how states told NCSL they expect to balance their books for 2009:

  • At least 16 states will reduce spending or eliminate programs.
  • Alabama, Arizona, Massachusetts, Minnesota, Nevada and Wisconsin plan to tap their rainy day funds.
  • Maine and Ohio expect to transfer money from other state funds to the general fund
  • California is among eight states considering tax increases. Massachusetts is eyeing increasing its state tax on cigarettes by $1 a pack.
  • Illinois continues to look at privatizing its lottery, while Maine may sell unclaimed property.

Although not detailed in this report, the governors of New Jersey, Pennsylvania and Texas are among those pushing to put tolls on state roads or privatize them as a way to raise money for the state.

"There's no panic," NCSL Executive Director Bill Pound told Stateline.org , but he said his group "fully expects to be underestimating" the number of states with budget gaps for 2009.

Last year at this time, most states were finding extra money in their bank accounts, with 41 figuring to end this fiscal year with a total of $31 billion more than planned, according to NCSL numbers.

But the stalled housing market, rising oil prices, plummeting consumer confidence and creeping unemployment rates have hit all but a few energy and farm states' budgets. Consumers and businesses are spending less, so state tax revenues are dipping.

Arizona, Nevada, California and Florida - states that enjoyed red-hot housing markets - now are facing the steepest deficits.

Sixteen states say their general sales tax collections - which account for one-third of state generated revenues - fell below their forecast, and in nine of these, collections were failing to meet a reduced forecast. Twelve states indicated that personal income tax collections were failing to meet the forecast and 16 reported corporate income tax collections were below expectations.

In its report, NCSL describes the current health of state budgets as "very uneven." For energy-producing states, the fiscal situation is strong and the outlook is good, NCSL said. But that situation is in stark contrast to states where the housing sector slump has been particularly severe or other fiscal challenges have prevailed.

California's state's budget outlook is "bleak," the report says, with a projected $16 billion budget shortfall over the current and next budget years combined. In Delaware, the outlook is "grim," while Washington state has adequate reserves at cover the remainder of this two-year budget cycle, "but the next biennium is expected to have a significant shortfall."

Twenty-three states reported a "concerned" outlook and only four states - Arizona, Delaware, New York and Washington - are downright pessimistic about next year's revenue performance. Ten states expect revenues to be stable in fiscal 2009, including energy-rich Oklahoma, Texas and West Virginia and some Midwestern states like Iowa and Missouri.

NCSL said South Dakota's comment best captures states' worry about future revenues: "The state outlook is relatively stable, but officials are concerned that national trends could drag the state down."