States Begin Long Climb to Recovery

The worst may be over as the bleeding in state budgets finally slowed this year, but the repercussions of how lawmakers made up the more than $100 billion in budget shortfalls to balance their fiscal 2011 spending plans will be felt throughout state government for years to come.

Look to nearly any state for examples of profound changes to the kinds of services states can no longer afford. In the new fiscal year that begins for most states July 1, Arizona eliminated state funding for full-day kindergarten and closed some parks. Virginia will no longer pay for eye glasses for the poor. South Carolina nearly cut in half funding for the agency that inspects restaurants and investigates fraud allegations. College students, meanwhile, faced double-digit tuition hikes in Arizona, California, Florida and New York.

In terms how far state revenues could — or couldn’t — be stretched, the 2010 state legislative session will certainly go down as one of the bleakest in a generation. It was also one of the most politically contentious. Implications of the new federal health care law that expanded coverage for millions of Americans dominated debate in some statehouses amid the larger discussion over whether the federal government had overstepped its constitutional powers. Arizona turned the national spotlight on immigration with its controversial law there, while high-profile bids to loosen gun laws and restrict abortion were frequent.

STATE RIGHTS INVOKED

The “feds” are often a favorite target of states’ angst, but the new federal health care law helped bring states’ rights fury to new heights in many statehouses, with varying results. Fueled in part by Tea Party activists’ call for limited government, state lawmakers took stands, sometimes just symbolic, in the name of state sovereignty. Here is a sampling:

Federal health care law: Six states passed measures challenging the sweeping federal law that would expand coverage to millions of Americans who are currently uninsured. Legislatures in Arizona, Florida, Missouri and Oklahoma will let their voters decide whether to prohibit penalizing patients for declining participation in a particular health plan. In addition, 21 states’ attorneys general are challenging the law as unconstitutional and an unfunded federal mandate on the states.

Abortion: The health reform debate also turned to abortion, a procedure states regulate. Arizona, Louisiana, Mississippi, and Tennessee banned abortion coverage in these states’ “health exchanges” created under the health care law. Even more sweeping is Nebraska’s new law barring abortion after 20 weeks that could lead to a new challenge to Roe v. Wade .

Guns: Arizona, Idaho, Montana, Tennessee, Utah and Wyoming, passed laws declaring that federal firearm regulations don’t apply to guns or ammunition made in their states. Arizona now allows concealed weapons. Virginia and Tennessee allow people to carry guns in bars as long as they have permits. Georgia made it legal for people to carry guns in some areas of airports.

But the overriding theme was the budget. “Clearly the fiscal problems have swamped everything else,” says Raymond C. Scheppach, executive director of the National Governors Association .

Two of the country’s most fiscally challenged states — California and New York — are still trying to figure out how to plug billions of dollars of deficits and craft new budgets for 2011. Both are eyeing deep spending cuts and layoffs, on top of the cuts and higher taxes both states implemented last year. Pennsylvania, which also is still working on its spending plan, hopes to avoid another 101-day budget impasse it had last year. Meanwhile, in Illinois, lawmakers approved a budget that they knew wa s out of balance, handing the job of cutting to Governor Pat Quinn, who plans to announce this week what he’ll do.

Lawmakers were forced to close a collective billion gap in their 2011 budgets while also finding another $28.2 billion to plug holes left in their 2010 spending plans. The tenuous 2011 budgets cobbled together with accounting maneuvers and one-time fixes could unravel if revenues don’t uptick or Congress doesn’t come through with help for Medicaid costs that some 30 states banked on when they crafted their plans. President Obama has pressed for state aid as imperative for avoiding ” massive layoffs at the local and state levels ” and to spur economic growth,but many in Congress are reluctant to add to an already growing federal deficit. Some states produced two budget versions, one with the extra federal dollars and another without.

Sujit CanagaRetna, a senior fiscal analyst at the Council of State Governments says states are in the midst of a “great transformation” as they figure out which services they can afford to provide. “The relationship between state governments and citizens has radically altered.”

Mired in joblessness, budget gaps

For the 45 states that had regular legislative sessions this year, uncertainty was the watchword as recovery from one of the nation’s deepest recessions has been choppy at best. Unemployment remains stubbornly high, hitting some states harder than others. Nevada, for example, saw its jobless rate hit a record 14 percent, the first time in six years that a state other than Michigan had posted the highest rate. Meanwhile, North Dakota continued to enjoy the lowest jobless rate with 3.6 percent .

But after two years of plummeting declines in revenue, states appeared to have hit bottom. Tax collections finally began to climb, albeit anemically, and experts suggest it will be 2013 at the earliest before state revenues return to pre-recession levels. Meanwhile, demands continue to grow as more people turn to states for Medicaid and unemployment help. At the same time, states know their federal stimulus dollars used to balance budgets will run out by year’s end.

Other factors beyond states’ control also have lawmakers concerned. BP’s oil spill threatens to slow an already sluggish economic recovery in the Gulf Coast states of Louisiana, Mississippi, Alabama and Florida. As the state legislative sessions closed, the full effect on tourism, fishing and the environment remained unclear because the damaged well is still leaking oil, which continues to wash onto beaches and wetlands. Meanwhile, other states wonder if that disaster will spike their oil prices.

Across the Atlantic, the debt crisis in Greece reverberated in U.S. statehouses, rattling some state lawmakers who worried that Greece’s free spending and unpaid public pension system foreshadowed consequences for states that didn’t get their own houses in order.

Few tax hikes, but more cuts and layoffs

States are loath to increase taxes, especially in this election year in which 37 governorships and more than 6,000 state legislative seats are on the ballot. That’s why most states went that route last year when a record $24 billion in taxes were raised to balance the books. This year, most of the hikes were targeted and limited. Colorado and Washington went after candy and soda. Wyoming will tax wind energy. Tobacco was still a favorite target in a handful of states, including in New York, which now has the highest cigarette tax in the nation at $4.35 a pack.

The exceptions were in Kansas, where the state legislature raised the state sales tax, and New Mexico, which doesn’t have a sales tax but rather a similar “gross receipts tax” that will go up. Arizona and Oregon let voters decide whether to raise taxes and they did, giving the nod to higher sales and income taxes, respectively. Meanwhile, Maine voters rejected a plan that would have decreased income taxes while extending the sales taxes to more goods and services.

Tax credits that states felt they could no longer afford also were on the table. Colorado dropped a property tax break for seniors and scaled back a tax credit for alternative-fuel vehicles. Iowa eliminated $115 million worth of job tax credits it didn’t think created jobs. Oklahoma suspended tax credits for restoring historic buildings and for generating wind power.

Their deficits forced states to take a close look at what they really wanted to spend their limited dollars on. “The day of reckoning is here,” says New Jersey Governor Chris Christie who has made his first term a referendum on his plan to cut $11 billion from the state budget, which lawmakers earlier this week approved. South Carolina Governor Mark Sanford, who for eight years complained the GOP-controlled legislature spent too much, touted this year’s $4.9 billion budget, a whopping $2 billion less than the budget passed two years ago, “fiscally responsible.” “You cannot spend money you do not have,” the outgoing governor said.

Critics say states spent too freely when times were good and failed to prepare for the downturn. “States aren’t entirely innocent,” says Joseph Henchman, director of state projects at the nonpartisan Tax Foundation. “There is room to cut before raising taxes.”

And cut they did. Even areas of the budget once considered untouchable were on the chopping block, notably education spending, which was reduced in more than 30 states last year. To save money, Florida lawmakers decided to let voters decide whether to loosen class size limits that voters adopted in 2002. Hawaii furloughed teachers for 17 days. Some 300 Louisiana State University instructors will get laid off because the LSU budget was cut 20 percent. Meanwhile, cuts in higher education sparked student walkouts and protests, including at the University of California at Berkeley where riot-geared police officers were called in.

Health care was saved from draconian cuts thanks to the stimulus and federal health care bills, which barred states from cutting back who is eligible for Medicaid. Arizona had hoped to eliminate its children’s health program and end Medicaid coverage for 300,000 low-income adults, but had to scrap those plans or lose stimulus dollars. But states trimmed elsewhere. Kansas no longer will cover cough and cold medications.Idaho withheld its payment to Medicaid providers. Florida cut reimbursement rates to hospitals and nursing homes.

Corrections was an easy target for lawmakers, but prison officials and others worry that some cuts could be counterproductive. For instance, Kansas slashed funding for a nationally recognized program aimed at helping ex-offenders stay out of trouble. Illinois and Oregon stopped early-release programs amid concerns over public safety. Other states took longer-term action. South Carolina, for example, overhauled its sentencing laws to send fewer lower-risk offenders to prison while cracking down on more serious criminals.

And while layoffs and furloughs were common, they didn’t always bring big savings. Among the 200,000 state workers furloughed in California are more than 5,000 employees who collect back taxes. For every dollar it has saved by furloughing these workers, the state has lost $7.15 in uncollected revenue, according to a state report . Nationwide, state workers were laid off in half the states and forced to take unpaid furloughs in 22 states.

Where states couldn’t cut, they borrowed. Connecticut borrowed nearly $1 billion for operating expenses for 2011, prompting Fitch Ratings to downgrade the state’s bond rating.  Illinois saw its bond rating tumble twice because of its debt. At least 13 states essentially emptied  their rainy day funds to balance budgets. 

Signs of reform

Lawmakers say they were too pressured to balance budgets to thoughtfully launch major reform. Still, there were signs of big changes in 2010, with many lawmakers predicting more in the coming year with the crop of new governors and lawmakers who will be elected this fall.

Georgia and Michigan talked of overhauling or “resetting” state government by sharing administrative services and consolidating the number and function of agencies. Vermont enacted a budgeting experiment called ” Challenges for Change” that cut $38 million by first determining how much money Vermont could afford to spend on key areas and then asking how to provide services with that amount. “It’s a huge change,” says state Senator Diane Snelling who hopes the state will eventually use the approach for the entire budget.

Even though states complain that their tax systems fail to provide predictable revenue, few did anything to change them. Rhode Island was one of the exceptions, changing deductions and tax breaks to try to keep revenues stable and attract business.

A dozen states did take significant steps to whittle down the estimated $1 trillion the Pew Center on the States ( Stateline’s parent organization) estimates states collectively owe in paying future public pension and retiree health care benefits. Illinois raised its retirement age to 67 for new hires, the highest retirement age in the country.  Wyoming started requiring current state workers to contribute to their retirement. And Utah closed its defined benefit plan to new workers, one of a handful of states to move away from traditional pension systems that have been in place for decades. These pension changes are the most significant in years.

States muddled through this budget-making cycle, but the fiscal landscape going forward will continue to be challenging for the crop of new governors and lawmakers who are elected this fall. All the “easy” cuts have long been made and rainy day funds depleted. “Fiscal 2011 is going to be a particularly difficult year with very tough choices,” says Scott Pattison, executive director of the National Association of State Budget Officers .

Stateline staff writers Stephen C. Fehr, John Gramlich, David Harrison, Melissa Maynard and Daniel C. Vock and interns Jake Grovum, Joey Peters and Ali Eaves contributed to this report.