State Spending to Drop in 2009

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, according to a new report released today (Dec. 15).

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 a new report from the National Association of State Budget Officers and National Governors Association. For the current year, states expect a 0.1 percent drop in spending.

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

The news comes as 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.

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.

These are among 31 states that must close nearly $30 billion in deficits from their current budgets before they even begin drafting new fiscal plans for the coming year, NASBO and NGA said in their report, "Fiscal Survey of States." "The housing market decline continued to negatively affect state revenues, particularly corporate and sales tax revenues," NGA Executive Director Raymond C. Scheppach said in a statement.

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.

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.

But states 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.

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.

For states, everything is on the chopping block: 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.

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.

Stateline.org staff writer Pauline Vu contributed to this report.