Stateline Story

State Budget Gaps Linger at Year's End

The current recession already has forced states to deal with greater budget shortfalls than they faced in the five years it took them to recover from the last national recession after the 2001 terrorist attacks.

Connecticut's 2010 legislative session is only three weeks away, but in Hartford, state lawmakers are still dealing with 2009 problems.

On Dec. 15, they gaveled themselves into a special session. Later the same day, they gaveled themselves out without voting on the governor's plan to solve the $467 million budget deficit that erupted since the state's two-year, $37.6 billion budget passed on Sept. 1.

"I've done my job. It's time for the legislature to act," Gov. M. Jodi Rell (R) told a business group the next day.

Over the past few months, state legislators around the country have been confronted with unfinished fiscal business tugging at them like a bad dream. Mid-year budget gaps have opened in dozens of states, brought on, in part, by overly hopeful revenue projections. According to the National Conference of States Legislatures (NCSL), 36 states are still facing shortfalls in the current fiscal year, even as governors are putting the finishing touches on their budget proposals for fiscal year 2011, which for most states starts in July.

Continuing job losses and anemic consumer spending have depressed tax collections and opened gaps ranging from tens of millions of dollars to the billions. All told, the new gaps total almost $28.2 billion, according to NCSL. That's on top of the $145.9 billion that state policymakers cut from their fiscal year 2010 budgets during legislative sessions earlier this year.

The mid-year gaps underscore how difficult it is to anticipate trends in a volatile recessionary economy and hint at larger troubles to come. They also have generated political skirmishes at a time of year that traditionally has been quiet in state capitals. So far, at least six states - Arizona, California, Connecticut, Nebraska, New Mexico and New York - have held special sessions since July 1 to deal with the budget. Arizona kicked off another special session on Thursday (Dec. 17).

"I've been in the Legislature 33 years, and we've had ups and downs, but this is the worst one," said Democratic state Rep. Henry Kiki Saavedra, who chairs New Mexico's House appropriations committee. "There's hardly any difference between this and the Great Depression."

Although mid-year deficits are not unusual during recessions, "this is really close to unprecedented," said Scott Pattison, executive director of the National Association of State Budget Officers (NASBO).

During the last recession in 2001, revenue from income and sales taxes were lower nationwide than states had projected for two straight years, according to Don Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government. In 1991, revenue fell short of projections for three years. NCSL estimates that states have at least two more difficult years ahead before their finances recover.

"I don't know whether we would have believed it if it had been predicted," said Craig Burns, Virginia's deputy secretary of finance, referring to the state's plunging revenues. "In normal times, whatever normal times is, it's a little clearer and more predictable."

Virginia officials have revised their revenue projections several times after tax receipts sank like a stone. In August, Gov. Tim Kaine (D) announced layoffs, cuts to higher education and prison closures to plug a $1.35 billion hole. It wasn't enough. Last month, a House of Delegates committee learned that declining revenues will force the commonwealth to cut an additional $300 million from its budget before the end of the current fiscal year.

Virginia is one of 38 states that allow governors to cut the budget during difficult times, according to a tally by NASBO, although in most cases there are restrictions on what the governors can do. In Maryland, for instance, a state panel consisting of the governor, treasurer and comptroller can cut programs or agencies only up to 25 percent. So far this year, the panel has cut $362 million from transportation funding, health care and financial aid for college students, despite calls from legislators to hold a special session to make these decisions.

Other states are in a similar bind. Across the country, legislative and executive officials have struggled to strike a balance of power to address their budget crises. But with shortfalls in the millions or billions, the process has the potential of becoming heated, whether lawmakers hold a special session or not.

Under statutes and state constitutions, legislators have more say in 12 states: Alaska, Arizona, California, Delaware, Iowa, Kansas, Louisiana, Michigan, Nebraska, New Hampshire, Rhode Island and Tennessee, according to NASBO. Still, governors in some of those states can get around legislative requirements. In Michigan, for instance, governors can reorganize agencies by executive order. In Iowa, the governor can unilaterally order across-the-board cuts, a tactic that Iowa Gov. Chet Culver (D) has used this year.

In October, Culver ordered a 10 percent reduction across state agencies to close a $900 million budget gap over the objections of some lawmakers who argued that the size of the deficit justified a special session.

"A number of Republicans saw that this was coming before Culver announced a 10 percent cut, so they had been calling for a special session for some time," said Tim Hagle, a political science professor at the University of Iowa.

Although a unilateral cut is "less messy," Hagle said, lawmakers should be allowed to weigh in. "It's the job of the legislature to make this sort of decision, shared with the governor, of course," he said.

In Massachusetts, the situation is reversed. Gov. Deval Patrick, a Democrat, has asked the legislature to return for a special session to give him the authority to close a $120 million gap, but House Speaker Robert DeLeo, also a Democrat, refused to cut short the lawmakers' holiday break. Bay State governors can unilaterally cut only executive branch agencies. Patrick has said that means he will be forced to slash social service programs unless lawmakers let him trim other agencies.

In New York, by contrast, the legislature has taken on more responsibility for budgetary matters. After a series of grueling special sessions, lawmakers approved a $2.7 billion deficit-reduction plan that wiped out most - but not all - of the state's $3.2 billion shortfall. The governor's hands are tied by a 1980 state Court of Appeals decision that found that the executive branch could not withhold money appropriated by the legislature. Still, Gov. David Paterson (D) is holding back about $750 million in aid to local governments and schools, a decision that has sparked lawsuits.

In Arizona, Gov. Jan Brewer (R) and legislators are holding a fourth budget-cutting special session this week. Late last month, a measure to cut spending went down by a single vote in the Republican-dominated state Senate, without picking up a single Democratic vote. The state faces a $1.6 billion shortfall.

Other states have had more success. New Mexico legislators approved $200 million in cuts in October, part of an effort to close this year's $650 million gap. The decision spared K-12 education but took a bite out of other agencies.

Nebraska stands out amid the political stasis. There, the nonpartisan, unicameral legislature last month reached agreement on $334 million in cuts and transfers to close the state's deficit.

"It took a while for us to get on the same page, but eventually we came out of the appropriations committee nine to zero and we got to the floor," said state Sen. Lavon Heidemann, committee chairman. The legislation was unanimously approved by the full legislature and signed by Gov. Dave Heineman (R) on Nov. 20, allowing lawmakers to wrap up their work before Thanksgiving.

"It was some of the roughest periods of time that I've spent in my life, but in the end, by tweaking here and tweaking there, we were able to get everybody on appropriations to get together, and when that fell together, it fell together on the floor," Heidemann said.

As difficult as these mid-year cuts have been, the picture isn't likely to improve when regular legislative sessions start in a few weeks. A recent Rockefeller Institute report found that state tax revenues in the third quarter of this year plunged 10.7 percent over the previous year, after dropping 16.6 percent in the second quarter. Still, some states see a glimmer of hope. Arkansas forecasters predict a 2 percent increase in revenue next fiscal year. And bookings for South Florida hotel rooms are up slightly. But those optimistic signs are still the exception.

"At this point (fiscal year) 2011 looks like it will have large gaps in many, if not most, states, and the latest revenue numbers suggest the gaps are continuing to grow worse," Rockefeller's Boyd said.

Legislatures used federal economic stimulus funds to balance their budgets this year, and many likely will do so again next year. But the federal money, which starts running out at the end of calendar year 2010, won't be enough to forestall drastic service cuts, say state officials.

Back in New Mexico, Saavedra is starting to feel the strain. "Nobody wants to smile anymore," he said. "Can you imagine? When you're cutting all the time?"