Sour Economy Limits States’ Options in ’08

(Updated 5:38 p.m. EDT, July 17, 2008)

For many states, 2008 will be remembered for record numbers of home foreclosures, -a-gallon gasoline and the beginning of a slide into new fiscal trouble after two years of overflowing coffers.

Stateline.org ‘s annual state-by-state look at legislative accomplishments, covering 39 states so far, finds lawmakers uneasy over finances and largely shying away from major expansions of public health-insurance programs or free preschool classes. A basket of new worries emerged: homeowners sucked into mortgage scams, the threat of expanding Medicaid rolls as unemployment rises, a looming shortfall in states’ main source of highway funding and predictions of even worse financial woes ahead.

Seeking new ways to replenish its treasury, New York in 2008 became the first state to target billions in Internet sales by requiring out-of-state retailers to start collecting sales taxes on state residents’ purchases, though Amazon.com is challenging the law in court. Pennsylvania Gov. Ed Rendell (D) solicited a whopping $12.8 billion bid from a private company to lease the state’s turnpike for 75 years, although resistance in the General Assembly is likely to punt the issue into next year.

While tax increases are usually a last resort for lawmakers, especially in an election year, Minnesota legislators overrode a veto by Gov. Tim Pawlenty (R) to hike the state’s gasoline tax by 8.5 cents a gallon to raise road and bridge funds in the wake of last year’s deadly Minneapolis bridge collapse. Maryland adopted a new tax on millionaires, and New York upped its tax on cigarettes from $1.50 a pack to $2.75 a pack – highest in the country.

With the race for the White House in full swing, states began waiting out the Bush administration to see whether they’ll fare better with a new president in a host of disagreements with the federal government. Numerous states are pushing for changes in federal policies on immigration enforcement, secure driver’s licenses, global warming, children’s health insurance and the No Child Left Behind education law.

In the biggest social policy development of the year, a court decision made California the second state after Massachusetts to legalize same-sex marriage, thrusting the volatile issue not only onto California’s November ballot but also into the presidential contest. The Republicans’ presumed nominee, U.S. Sen. John McCain of Arizona, supports a California ballot measure to reverse the court ruling and ban gay marriages, while Democratic contender U.S. Sen. Barack Obama of Illinois has announced his opposition to the measure. Voters in Arizona and Florida also will be asked to decide Nov. 4 whether to prohibit gay marriage.

Among this year’s most common legislative moves were efforts to reduce greenhouse gases, curb smoking, promote gym classes in schools and tighten restrictions on teen drivers. Eleven states passed rules to make their own buildings more energy efficient, according to the Edison Electric Institute, an industry group. Five states added restrictions for teenage drivers from curfews to banning cell phones, leaving only Arkansas, Kansas and North Dakota without special rules for new drivers.

Stateline.org has compiled state-by-state summaries of 39 legislatures that have adjourned or passed budgets so far. New summaries will be added as other legislatures finish their work, along with updates on the trends and precedent-setting policies to emerge from state capitols. See a state-by-state summary of legislative action.

Revenues Dip, Though Not For Oil and Grain States

Economists and politicians may debate whether the country has technically fallen into a recession, but figures released July 1 suggest some states are on the brink and others already there with state tax collections in early 2008 at their lowest in nearly five years.

Some economists note an eerie similarity to conditions just before the 2001 recession and expect state revenues to weaken further in this fiscal year.

Arizona, California, Florida, and Nevada – hit hardest by the collapse of the housing market – took the biggest knocks in their state budgets. They were among 13 states forced to plug budget gaps totaling $5 billion to stay in the black through June 30, according to a June report by state budget officers .

For fiscal 2009, which began July 1 for all but four states, lawmakers in 23 states had to address $26 billion in shortfalls as they put together their new budgets, the National Conference of State Legislatures (NCSL) reported in April. This summer’s floods in the Midwest, particularly along the Mississippi River, could wreak havoc with the economies of Illinois, Indiana, Iowa, Minnesota and Missouri.

Unlike the recession of 2001, not all states are feeling the economic pain. About a dozen states that produce oil, gas or grain are benefiting from high energy and commodity prices. So, while Rhode Island had to close a $422 million shortfall, North Dakota has a $740 million surplus largely because of its oil and agriculture production. New Jersey just slashed $2.9 billion in spending to balance its 2009 budget, but Texas could have a $10.7 billion surplus for its next two-year budget when the Legislature convenes in January because of a 58 percent increase in oil-production tax revenues.

When the books wouldn’t balance any other way, lawmakers shorted pension funds, borrowed against future revenue, grabbed from reserves or put off big payments to schools or health providers until next fiscal year.

In California, lawmakers rejected a plan by Gov. Arnold Schwarzenegger (R) to release inmates and close dozens of state parks to erase a $3 billion deficit for 2008. Instead they delayed $1 billion in K-12 payments to schools, deferred Medicaid payments and issued $3.3 billion in deficit-financing bonds to balance the books. This fiscal year, California lawmakers rebuffed Schwarzenegger’s proposal to borrow against future lottery profits to eliminate a $15 billion shortfall and still were in budget talks, even though the new fiscal year already has started.

Wisconsin Gov. Jim Doyle (D) used money from the state’s road fund – again – to pay for day-to-day operations.

To deal with tight budgets, governors in Kentucky and Tennessee who had pledged to expand pre-kindergarten programs had to settle for getting neither cuts nor increases. Virginia Gov. Tim Kaine (D) pushed for an ambitious pre-K program but wound up with only $22 million in new money over the next two years. South Carolina trimmed funding for its half-day pre-K program but not its full-day classes. On the plus side, Kansas received an additional $2.5 million for its program and expects to receive more later from an $11.9 million block grant, Alabama Gov. Bob Riley (R) got the $20 million increase he requested, and Colorado lawmakers approved a plan to add 4,000 more kids.

Gas Prices Take Their Toll

With gas prices reaching unprecedented levels, state policymakers tried to ease constituents’ pain at the pump. Connecticut, Georgia and West Virginia blocked scheduled increases in the gasoline tax in those states.

But bids elsewhere to lower state gasoline taxes, which add 8 cents to 45.5 cents per gallon, failed. The revenue usually pays for road construction, which is itself more expensive because of higher fuel costs. Adding to the limited maneuvering room, the federal Highway Trust Fund – a main source of state road construction money fed by the federal gas tax of 18.4 cents per gallon – is expected to fall $3 billion short this year, meaning a 34 percent reduction of payments to states unless Congress finds more money.

The most dramatic reaction came from Utah Gov. Jon Huntsman (R), who ordered 17,000 of the state’s 23,000 employees to work 10 hours a day, four days a week, a change that will close a third of state buildings on Fridays, starting Aug. 1. Florida, Indiana, Kentucky and South Carolina have also switched some employees to shorter work weeks.

Momentum Slows for Big Health Reforms

The push toward universal health care, in which Maine, Massachusetts and Vermont have led the way since 2003, ebbed in 2008.

States considering health-care expansions, including Illinois, Missouri, New Mexico and Pennsylvania, were stopped short not only by slowing revenue growth but also by data showing the Massachusetts and Vermont initiatives were costing more than predicted. New Bush administration policies that make it more difficult for states to offer health insurance to all but the poorest working families also stymied states’ expansion plans.

Still, New York took a significant step to expand health coverage for children, even without federal help, by agreeing to cover an additional 400,000 uninsured kids at its own expense.

And New Jersey became the first state to require parents to get health insurance for their kids, but there’s no punishment specified for parents who don’t.

A recent spike in the U.S. unemployment rate – up to 5.5 percent in June from 4.6 percent a year earlier – could lead to more stress on state Medicaid budgets as people who lose their jobs qualify for taxpayer-financed health benefits. Every percentage-point increase in the unemployment rate means 1.1 million more uninsured Americans and 1 million more on Medicaid, according to the Kaiser Commission on Medicaid and the Uninsured . Medicaid, a taxpayer-funded health insurance program that covers 59 million poor Americans, is the single biggest expense in state budgets.

Health worries over childhood obesity led at least five states – Arkansas, Florida, Oklahoma, Texas and Virginia – to boost the time school kids must spend either at recess or in gym class.

Mortgage Crisis Draws New State Regulation

While the federal government tried to jump-start the economy with $600 rebate checks to individual taxpayers, Ohio, Florida and Vermont passed economic stimulus packages of their own using pension funds, bond money and tax credits to try to revive businesses.

A few states also tried to help struggling homeowners, particularly those with risky “subprime” adjustable-rate loans that became unaffordable once interest rates jumped. A new Virginia law, for example, requires lenders to give homeowners in danger of default a one-month breathing spell before foreclosure, while New York will grant a three-month reprieve.

In all, 29 states passed 66 bills related to mortgage licensing, often to set up or tighten licensing standards for mortgage brokers, according to the National Conference of State Legislatures (NCSL).

Four states – Kentucky, Maryland, Utah and Washington – created the specific crime of mortgage fraud. At least seven states and Washington, D.C., enacted new laws to curb foreclosure-rescue scams by banning some unscrupulous lending practices. Maryland enacted what is now the toughest statute – banning all mortgage-rescue transactions that require a homeowner to sign over his deed.

Emotions Run High Over Immigration Proposals

A federal-state clash over rules to make driver’s licenses more secure ended anti-climactically in March, as the U.S. Department of Homeland Security gave states – even those that didn’t ask for it – more time to comply with the federal Real ID law. The agreement, in effect, leaves it to the next president and Congress to hash out objections to the cost and privacy issues raised by Real ID, which will force state officials to verify the identities of all 245 million drivers when their licenses need renewal.

Even after the truce was announced, states continued to thumb their nose at the feds. In June, Arizona became the 10 ^th state to vote to prohibit the state’s compliance with Real ID, according to NCSL data .

In an outgrowth of the flap, Maine became the third state this year (with Oregon and Michigan) to stop issuing licenses to undocumented immigrants. That means only four states – Hawaii, New Mexico, Utah and Washington – now allow illegal immigrants driving privileges .

Frustrated with federal inaction on the estimated 12 million undocumented immigrants living in the country, states continued to take matters into their own hands. Missouri, Mississippi, Utah and South Carolina this year joined a growing list of states to impose new requirements on employers to check the identities of job applicants.

Abortion, Racial Discrimination Highlight Social Trends

On the social-policy front, two more states added an ultrasound imaging provision to their abortion laws, bringing the total to 16, according to the Guttmacher Institute , a research organization promoting abortion rights. Oklahoma’s provision, which requires doctors to show an ultrasound image to all women seeking an abortion, is the strictest of its kind in the country.

To ease the transition of veterans of the wars in Iraq and Afghanistan back into society, Ohio Gov. Ted Strickland (D) issued an order in July making Ohio the first state to grant in-state tuition rates to all military veterans and their immediate families.

Connecticut, Louisiana and New York made it a crime to display a hangman’s noose to try to intimidate or harass. The measures were a response to several high-profile incidents, most notably in Jena, La., where display of a noose unleashed racial violence at a high school last year and escalated into the nation’s largest civil-rights demonstration in years.

Florida became the sixth state to offer an official apology for slavery. The Legislature also changed the words of Florida’s official song, “Old Folks at Home,” to eliminate reference to “darkies.”

And evolution tinged debate over an “academic freedom” bill signed by Louisiana’s Jindal. The law allows teachers to tell their classes about opposing arguments on scientific hot topics such as global warming and evolution. Critics say it’s a backdoor way to promote creationism or intelligent design.

Global Warming and Water Top Environmental Concerns

States continued to far outpace the federal government in efforts to fight global warming.

New coal-burning power plants, in particular, are receiving increased scrutiny because of their greenhouse-gas emissions. According to the Sierra Club, plans for new coal-fired plants have been challenged in 24 states in the wake of a 2007 U.S. Supreme Court decision ordering the federal government to regulate carbon dioxide, the same gas exhaled by humans and emitted during coal combustion, as an air pollutant. The Kansas Legislature this year tried but failed to overturn a decision by Democratic Gov. Kathleen Sebelius’ administration to block construction of a new coal plant.

Wyoming lawmakers, meanwhile, established a legal framework to allow companies to store carbon-dioxide gases underground, where the emissions from coal-burning plants won’t contribute to the greenhouse effect that could lead to climate change.

Delaware and New Hampshire agreed to join a New England regional effort – similar to others in the nation – to cut emissions through a “cap-and-trade” system that lets polluters either cut greenhouse gases or buy credits from companies that have exceeded requirements.

Connecticut imposed across-the-board caps on the amount of carbon dioxide the state will emit by 2020. California, Hawaii, Minnesota, New Jersey and Washington state already agreed to comprehensive limits on the carbon dioxide they’ll release .

Water rights – a perennial issue in the Western United States – rose to the surface in the South and Midwest this spring.

An ongoing drought prompted Georgia lawmakers to dredge up a 190-year-old complaint that surveyors mistakenly marked the state’s border with Tennessee, depriving Georgia of access to water in the Tennessee River. And Great Lakes states forged ahead with an agreement that would prevent people outside the Great Lakes basin from taking lake water. Eight states – Illinois, Indiana, Pennsylvania, Michigan, Minnesota, New York, Ohio and Wisconsin – have approved the Great Lakes Compact, which was negotiated by the eight Great Lakes governors and two of their Canadian counterparts. Congress still must ratify the agreement.

11 Governors’ Seats at Stake on Election Day

The presidential election isn’t the only political contest in November. In 44 states, state legislators will appear on the ballot, and 11 governors’ seats are up for grabs, including open seats in Delaware, Missouri and North Carolina.

After taking a huge role in juggling the 2008 presidential primary calendar in an attempt to redistribute influence over choosing the parties’ nominees, a handful of states now are trying to change the way the country picks its president in the general election, too. Hawaii, Illinois and New Jersey this year joined Maryland in enacting laws that seek to ensure that the winner of the popular vote wins the Electoral College .

Scandal also reshaped the political landscape, as New York Gov. Eliot Spitzer and Ohio Attorney General Marc Dann, both Democrats, resigned in disgrace. Illinois Gov. Rod Blagojevich (D) is fending off calls for impeachment, even from members of his own party. Nevada is abuzz over the details surrounding the breakup of Gov. Jim Gibbons’ (R) marriage. In Pennsylvania, a scandal nicknamed “Bonusgate” has engulfed the House Democratic caucus, after 12 current and former House members and staffers were indicted in July for what a grand jury alleged was “a concerted plan to use taxpayer funds, employees and resources for political campaign purposes.”

Stateline.org staff writers Stephen C. Fehr, John Gramlich, Pamela M. Prah, Christine Vestal and Pauline Vu and interns Daniel Petty and Nathaniel Weixel contributed to this report.