Stateline Story

Recession Pounds States' Budgets

  • June 15, 2009
  • By Pamela Prah

As Americans struggled with the worst fiscal crisis in a generation, states will remember the first half of 2009 for staggering budget deficits, record unemployment and the largest infusion of federal dollars into their treasuries since the Great Depression.

To date, lawmakers in about half the states have closed shop for the legislative year. But as tax revenues continue to come in lower than expected, it's a good bet that many will have to reconvene to balance their budgets as required by law.

Stateline.org's annual review of state-by-state legislative actions, thus far, finds at least seven resorted to higher personal income and sales taxes, seven levied heftier cigarette taxes and at least 11 raised motor vehicle registration or court fees. But it may not be enough. Despite working to erase more than $121 billion in projected deficits as they balanced their budgets for fiscal 2010, which starts on July 1 for all but four states, state lawmakers faced the prospect of new shortfalls that would require more spending cuts or new revenue.

Many lawmakers had to shelve ambitious agendas on a wide range of priorities that included covering some of the estimated 47 million Americans without health insurance and offering more college scholarships. Instead, they spent much of their time frantically trying to patch budget holes with a windfall of federal stimulus dollars that many weren't sure how to tap.

More than a third of the $787 billion federal economic stimulus package that President Obama signed into law in February goes to or through states. Governors have scrambled to name "stimulus czars" and set up recovery offices and Web sites to meet numerous oversight requirements. But the law's reliance on governors to ensure the money is spent well has left some state legislators feeling left out of the largest public works program since World War II.

The $46 billion of recovery money already flowing into states this year has helped many states avoid draconian cuts in health care and education programs. Aimed at avoiding layoffs of teachers and police officers, federal stimulus dollars allowed at least seven states to expand programs for prekindergarten-age children. But at least two states, New York and Washington, had to trim their preschool programs.

The economic package also gave Colorado, Kansas and Montana the cushion needed to expand their health care programs for needy children. Thousands of transportation projects have been selected to get federal funds, but much of the $50 billion the stimulus sets aside for transportation will be paid out in 2010 and 2011.

At the same time states were grappling with billion-dollar deficits and spending their stimulus dollars, lawmakers also set their sights beyond the fiscal arena to pass historic laws on gay marriage, the death penalty and abortion.

Stateline.org has compiled state-by-state session summaries of 25 legislatures that have finished their 2009 sessions and looks at the trends developing in key issues such as education, health care, homeland security, social policy and transportation. Click here to see our analysis, chart of legislative sessions and other graphics. Check back for new additions and updates .

Worse is yet to come

State leaders began the year knowing that the country was officially in a recession, but few could predict how dire their fiscal predicament would be. States closed $100 billion in shortfalls with the help of the federal stimulus, and by cutting programs, dipping into rainy day funds and raising taxes and fees.

Even with the federal stimulus package dumping billions of dollars into the states, California, Kentucky, New York, Nevada and Washington faced the largest deficits in their states' modern history.

While 2009 is bad, states worry 2010 and beyond will be even worse. Even if the national recession ends this year as many predict, the outlook for states is bleak. State fiscal conditions historically lag behind national economic recovery. The year after a recession ends is typically when state budgets are hit hardest, because by then, Medicaid rolls have swelled with the higher numbers of the unemployed who have lost their health insurance.

Many state leaders also predict serious budget trouble when the flood of federal stimulus money ends in two years. At least six Republican governors came under fire for turning back a small portion of their stimulus share for fear of trouble funding new or expanded programs after the stimulus money runs out.

States are trying to balance their budgets at a time when state and local sales tax collections experienced their worst decline in 50 years and demands for state services are up dramatically as laid-off workers and struggling families seek unemployment benefits, food stamps and health care.

Eighteen months into this recession, the number of jobs lost is already more than twice what it was during the last big recession from 1981 to 1982, putting unprecedented pressure on state unemployment agencies, despite efforts to beef up staffing and phone lines. The more than $6.5 billion monthly tab for unemployment checks is siphoning so much money from states' trust funds that all but a few have borrowed money from the federal government already or will soon need to.

Few states spared

States' financial outlook is so bad that nothing is off the table. Kentucky, famous for its bourbon, ended its sales tax exemption for alcohol; the governor of Mississippi, Republican Haley Barbour, a former tobacco lobbyist, agreed to a 50-cent tax increase on a pack of cigarettes - the first hike in nearly 25 years. But it wasn't enough. Both states expect to hold special sessions later in June to balance their budgets with Kentucky considering allowing slots at the state's famed horse racing venues and incentives to attract a new NASCAR track.

Nowhere is the situation as serious as in California, where Republican Gov. Arnold Schwarzenegger has called for plugging the state's $24 billion budget deficit by eliminating welfare for 500,000 families, terminating health coverage for nearly a million low-income children and closing 220 state parks.

New York, pummeled by Wall Street's implosion, is bracing for deficits to climb to $6 billion over the next year after it closed a $17.7 billion deficit this year by raising income taxes on the rich and imposing a host of hefty fees on state services.

Even states that have been largely spared from the recession are being forced to make cuts. Idaho reduced year-over-year funding for elementary and secondary education for the first time in its history. Energy-rich Wyoming trimmed its budget for the first time in at least 20 years as it financial forecasts sobered.

Effects felt widely

Who will be hit the hardest? State employees, once thought to have the most secure jobs with the best benefits, are being furloughed, their wages frozen and benefits cuts. California, which let go 10,000 part-time and temporary employees last July, is considering laying off 5,000 more by the end of June. Nevada instituted a one-day-a-month furlough for state workers to save $333 million. Louisiana's treasurer is pushing the state to trim 15,000 state government jobs over the next three years to help cope with budget problems.

Programs for the elderly and disabled also were on the chopping block. Nursing homes in Florida, for example, will not receive an anticipated cost-of-living increase and Georgia cut services for the elderly.

Colorado, Kansas>, Michigan, North Carolina and Washington are among states closing prisons this year to save money.

Businesses, travelers and motorists also will pay. Electricians, plumbers, funeral directors and Christmas-tree growers in Washington state will pay more for their licenses. Travelers to Hawaii or Nevada will have higher hotel taxes, and drivers in eight states will dole out more for licenses or vehicle tags. Florida, Iowa, Minnesota, Nevada and Utah all raised court fees to bring in more revenue.

Downloading music will cost more for some. Vermont and Washington applied their state sales tax to certain digital goods, such as online music, and Kentucky imposed its sales tax on software, cell phone ring tones and other products.

"Sin taxes" were an easy target as Florida and Rhode Island increased their cigarette taxes $1 a pack and Arkansas, Hawaii, Mississippi, Kentucky and Vermont also boosted tobacco taxes. Beer drinkers in New York will have to fork over $3.40 more a case. New York also raised its tax on wine and cigars.

The $100 billion in the federal stimulus package for schools over the next two years helped many legislatures avoid severe education cuts, at least for now. But shortfalls were too deep to avoid cuts for schools in Idaho, Kansas, Utah, Nevada and Washington. And higher education is taking a hit, too, with higher tuition in the offing in several states, including Florida, Kansas and Washington.

The federal stimulus package also blunted many budget cuts in health care programs because Congress stipulated that states would lose their share of the package's $87 billion in Medicaid money if they toughened eligibility standards and application processes they had as of July 1, 2008. That meant some states like California and South Carolina had to roll back newer policies that cut eligibility or tightened enrollment to get the federal dollars.

A few lucky energy-rich states were able cut, not raise, taxes. North Dakota was so flush that lawmakers gave themselves and state employees a 5 percent pay raise and approved $400 million in income and corporate tax cuts. Montana and Wyoming cut property taxes.

Several states moved to help the increasing number of homeowners falling behind on their mortgage payments. Under new laws in California, Colorado and Michigan, lenders cannot foreclose on a home for at least 90 days, giving homeowners more time to work out a payment plan. In Washington, homeowners now have 60 days before they have to leave the property.

Gay marriage debated

The economy may have dominated the session, but lawmakers also made important changes on the social policy front.

Vermont, Maine and New Hampshire became the first states to sanction gay marriage legislatively while the Iowa Supreme Court made it legal for same-sex couples to marry in the heartland, bringing to six the number of states where same-sex couples can marry. But the nation remains divided over the issue. Thirty states, including California, have constitutional prohibitions against same-sex marriage. Nevada this year joined seven other states that offer domestic partnerships or civil unions.

On abortion, Georgia passed the country's first law that allows human embryos to be formally adopted by prospective parents the same way a baby can be adopted. Opponents say the measure is a backdoor attempt to grant legal rights to embryos.

Arkansas became the 15th state to ban the late-term abortion procedure known as a "partial-birth abortion." Kansas, Ohio and North Dakota now require clinics to post notices informing women they cannot be coerced into having an abortion.

And New Mexico in March became only the second state, after New Jersey in 2007, to repeal its capital punishment law since the U.S. Supreme Court reinstated the death penalty in 1976.

Shake-ups in state capitols

Many expected 2009 to be quiet in state political circles before the surge of 37 gubernatorial races in 2010, but the year will go down as one of the most explosive with the historic impeachment and removal of Illinois Gov. Rod Blagojevich (D).

Replaced in January by Lt. Gov. Pat Quinn (D), Blagojevich is expected to go on trial next year on federal corruption charges that include scheming to sell the U.S. Senate seat that opened with Barack Obama's presidential win. Blagojevich has denied the charges.

A state contracting probe derailed New Mexico Gov. Bill Richardson's (D) plan to head Obama's Commerce Department, but President Obama tapped five former or current governors for his administration, including one pick that upset the political landscape of a Western state. Obama's selection of Arizona Gov. Janet Napolitano (D) to lead the Department of Homeland Security hoisted her Republican lieutenant governor, Jan Brewer, into the governor's mansion, giving Republicans control of both the legislative and executive branches.

Political scandal also marked the legislative sessions in Massachusetts and Florida, where the House speakers resigned in disgrace over corruption charges.

This year holds just two governor's races, in New Jersey and Virginia, but both parties hope wins will provide momentum for next year's contests. In New Jersey, Gov. Jon Corzine (D), a former Wall Street executive, will go against Chris Christie, a former U.S. attorney.

In Virginia, state Sen. Creigh Deeds (D) will oppose Attorney General Bob McDonnell (R) in the race for the seat now held by Gov. Tim Kaine (D). Kaine, whom Obama picked to head the Democratic National Committee, is barred from running again. Virginia is the only state that limits its governors to one four-year term.

While New York didn't have state elections in 2009, the state Senate is in turmoil. After winning the state Senate last fall after 40 years in the minority, Democrats briefly lost control in June. Frustrated by what they called chaos in the Senate, two Senate Democrats in June teamed with Republican senators to put a Republican as majority leader. But June 16, one of the Democrats reportedly switched sides again, which would leave the chamber split 31 to 31. Measures that Democrats had been pushing now may be derailed. They include bills to strengthen abortion rights and legalize same-sex marriage.

Stateline.org staff writers Stephen C. Fehr, John Gramlich, Christine Vestal, Daniel C. Vock, Pauline Vu and interns Emily Kimball, Kimberly Leonard, Tony Romm and Rob Silverblatt contributed to this report.