Stateline Story

Budget Gap Could Widen to $200 Billion

  • December 15, 2008
  • By Pamela Prah

States face their worst fiscal challenge in 25 years as the national recession could punch a $200 billion hole in state budgets over the next two years, the head of the National Governors Association said Dec. 15.

NGA Executive Director Raymond C. Scheppach predicted a slow recovery for states. "This is going to be a four-year difficult period" for state budgets, he said.

The economic tailspin also is hitting state spending. For the first time in 25 years, states expect to see a decrease in spending in the current fiscal 2009 budget cycle, NGA and the National Association of State Budget Officers said in their latest "Fiscal Survey of States" released Dec. 15.

Thirty-one states will have to close nearly $30 billion in deficits from their current budgets before they even begin drafting new fiscal plans for the coming year, Five additional states also reported shortfalls, but didn't include figures.

"As bad as the situation is for states right now, all indications are that the fiscal conditions for states will continue to deteriorate," NASBO Executive Director Scott Pattison said.

The current recession, which officially began last December, is hitting states at all levels, Pattison said, including corporate and sales tax revenues whereas the 2001 recession hit primarily personal income taxes. "It's not a pretty picture," Pattison said.

During the 2001 recession, states were forced to close $264 billion in budget gaps over five years.

Balancing the books for this fiscal year is looking tougher for states as the number of people filing for unemployment benefits for the first time jumped to a 26-year high. As more workers lose their jobs, they lose their private health insurance and turn to the state-federal Medicaid program, which serves 59 million poor Americans.

"Unfortunately, virtually all states are now in recession or at risk, and states expect continued expenditure pressures from a variety of sources, including Medicaid, employee pensions and infrastructure," the groups said in a statement.

Twenty-seven states have already made cuts to their fiscal 2009 budgets, which started July 1 for all but four states. Only 13 states had to make mid-year cuts the previous year compared with only three in fiscal 2007, he said.

Most governors are lobbying Congress and President-elect Barack Obama for billions of dollars in federal aid to help states cover rising enrollment in Medicaid, unemployment benefits and the food stamp program, and for a massive public works program to fix the country's crumbling infrastructure.

Scheppach said his group will update its recent paper that outlined $126 billion of "potential recovery programs" and will provide Congress and the incoming Obama administration more specific monetary targets that would help states. NGA and the National Conference of State Legislatures are among state organizations pushing for state aid in an economic stimulus.

But not all governors and state lawmakers are on board for fiscal relief from Washington, D.C. Republican G ov. Mark Sanford of South Carolina is the most vocal critic among the governors opposing a federal bailout. The American Legislative Exchange Council , an organization of conservative state lawmakers, has joined some 60 groups sending a letter to Congress opposing such a move. "Clearly, some states and localities allowed themselves to be caught up in the borrow-and-spend mania," they wrote.

The latest NASBO/NGA report suggests a dramatically different outlook for state spending. For the first time in 25 years, states expect to see a decrease in spending in the current fiscal 2009 budget cycle - a reflection of how the economic tailspin is affecting states, the groups said.

State spending grew 5 percent last fiscal year, below the robust 9 percent growth states saw in fiscal 2007 and even lower than the 30-year average of 6.4 percent, according to the report. For the current year, states expect a 0.1 percent drop in spending.

And states in 2009 will have considerably less money in their reserves to help balance their books. While during the boom times, states set aside extra money into their "rainy day" funds, those reserves are quickly depleting. States expect to have $48 billion or 7 percent of expenditures in their reserves in fiscal 2009, down from nearly $70 billion two years ago, according to the NASBO/NGA report.

However, the report notes that the overall balance levels were skewed high because resource-rich Texas and Alaska increased their reserves by nearly 200 percent over the last two years. If those two states aren't included, then the states' rainy day fund total drops to only $27 billion in fiscal 2009, only 4.1 percent of expenditures and below the 5 percent mark that most bond rating agencies recommend that states hold in reserves.

Even elementary education, which politicians are loath to cut, is on the chopping block, Scheppach said. Hawaii and Nevada have already cut K-12 while Alabama, New York, Utah and Virginia are looking to reduce school funding.

States also are already slashing Medicaid and other public health programs. So far this year, 12 states have cut back on optional Medicaid benefits such as vision and dental coverage, according to a new report from Families USA , a health care advocacy group.

Consider:

  • California's new requirement that children reapply for Medicaid benefits every six months, instead of annually, is expected to cause more than 260,000 children to fall offthe rolls by 2011.
  • A similar Arizona requirement for adults means about 4,500 people will lose coverage there.
  • Another 3,700 aged and disabled people will lose coverage in South Carolina since the state reduced the monthly income limit by $30.

And even more states are looking to pare the Medicaid rolls, according to Families USA. Florida could drop coverage for 19- and 20-year-olds, Tennessee might impose new re-application requirements that would drop up to 90,000 people from its program, and Nevada has proposed reducing Medicaid eligibility for the aged and disabled.

For states, everything is on the table: New York is considering four-day school weeks, Washington state may drop dental coverage for poor adults and the cost of a fishing license and death certificate could go up in Oregon as states scavenge to save money in the recession.

New Hampshire decided to suspend jury trials for a month to save money; Michigan has closed two prisons; Idaho may lay off 63 part-time workers who help the state collect taxes.

At universities, which are expecting less state funds, the University of Arizona officials may mow the grass and take out the trash less often to help offset an expected state budget cut, while the president of the University of Maryland at College Park is considering closing the campus for a day to help the state deal with an estimated $200 million revenue shortfall in fiscal 2009.

And in California, Gov. Arnold Schwarzenegger Dec. 11 warned the state faced "financial Armageddon" unless lawmakers take decisive action to shrink a budget deficit that has ballooned to nearly $40 billion for the next two years.

Even politicians are tightening their belts. Kentucky Gov. Steve Beshear (D) and his lieutenant governor took a 10 percent pay cut, saving the state $100,000, while Indiana Gov. Mitch Daniels (R) refused a $13,000 pay hike. Lawmakers in Georgia and Pennsylvania recently rejected cost-of-living raises for themselves.

The slumping economy is beginning to take a toll on energy states that up until now had coffers overflowing with revenues from oil, natural gas, coal, metals and agricultural products. Those same states were largely unscathed by the subprime mortgage crisis: Alaska, Iowa, Indiana, Montana, Nebraska, North Dakota, Oklahoma, South Dakota, Texas, West Virginia and Wyoming.

"This is going to turn out to be a far more serious time for the state than we've had, certainly in my time as governor, about having to make some serious decisions about priorities," Wyoming Gov. Dave Freudenthal recently told The Associated Press.

Complicating matters for states is the fluctuating stock market and rising unemployment, which prevents state economists from giving governors and legislative leaders reliable budget projections for the coming year because the numbers keep changing.

The "Fiscal Survey of States" provides an annual snapshot of states' finances. The 80-page report features state-by-state data including tax cuts and increases, preliminary figures for fiscal 2008 and projected year-end balances for 2009. The data were collected this fall.

NASBO and NGA echo similar predictions from the National Conference of State Legislatures, which reported Dec. 4 that states faced $32 billion in shortfalls for current budgets and $65 billion in deficits for the next fiscal year.