As State Budgets, Payrolls Shrink, So Do Ambitions

Four years ago, Washington Governor Chris Gregoire beamed as she presented her new state budget to the public. It was a good-times spending plan that took billions of dollars in tax revenue drawn from a bustling high-tech economy and poured it into education, health care and social services. "I love my budget," she said, calling it a roadmap "to change the status quo."

These days, Gregoire would love to return to the status quo of old. Last month, she proposed another two-year budget that is notable not for the investments it makes, but for the spending cuts it requires, many of which reverse her priorities of just a few years ago.

Gone are subsidized health insurance for 66,000 working poor and 27,000 children; funding for early childhood education; the state tourism office; and even Washington's 2012 presidential primary election, which she intends to cancel in favor of party caucuses to save $10 million. If approved, the budget would be the first one in Washington State since the Great Depression to decrease overall state spending from one biennium to the next.

One liberal advocacy group that often sides with the Democratic governor calls her plan " a giant step away from our values as Washingtonians ." Gregoire herself agrees. "I hate my budget," she told reporters in Olympia on December 15. "In any other time I would not sign this budget," she added . "It's difficult to support something that goes against all we have accomplished over the past six years. But these are the circumstances we find ourselves in, and we have been left with few options."

Gregoire's budget is a striking, yet now common, example of how far — and how fast — states' fortunes have fallen after a deep recession and only a sputtering economic recovery.

While many states' tax collections are on the rise again, they are far short of where they were before the recession began at the end of 2007. In 2009 alone, total state revenues dropped by nearly one-third, according to U.S. Census Bureau figures released last week .

As a result of sharp revenue declines, most governors, like Gregoire, now spend their time deciding which state services to cut, not which programs to build. Where politicians of both parties used to pride themselves on the ambitious initiatives they created — universal health care in Massachusetts, for example, or regional greenhouse-gas reduction collaboratives — they now speak of themselves first as budget-cutters-in-chief, making unpopular but necessary fiscal decisions to keep their states running.

While Gregoire and many other state leaders bemoan this current era of shrunken ambitions, some new governors who won election in November see it as a good thing. In their view, the current cycle of budget cuts represents not only a correction of states' overspending in the past, but an opportunity to sharply reduce the size and scope of state government going forward.

"Under our administration," Wisconsin's new Republican governor, Scott Walker, declared when he was inaugurated last week, "state government will do only what is necessary — no more, no less."

Budgets shrink, but Medicaid demand grows

From Oregon to Rhode Island, state governments today are smaller, stingier versions of what they were just a few years ago, even as more than half of them are asking residents to pay more in taxes. The changes are beginning to reshape the relationship between state governments and the citizens they serve, as well as the public employees who work for them.

For the past two years, something that is often talked about but rarely happens actually occurred: Overall state spending declined. It was the first time that happened since the National Association of State Budget Officers began tracking state expenditures 23 years ago. Between fiscal years 2008 and 2010, general fund spending for all states dropped by 10 percent.

At the same time, the recession and its aftermath have put staggering demands on state services. Enrollment in the state-federal Medicaid program, which provides health care to the poor, has surged to an all-time high — more than 48 million people — as those who lost health insurance looked to the government for help. States now spend more money on Medicaid than on any other part of their budgets, including K-12 education. That trend is expected to continue.

"It's hard for me to believe that Medicaid won't be the largest part of total state spending for quite a while," says Scott Pattison, NASBO's executive director. "And that's pretty unbelievable."

While states are providing health care to far more people, they don't have the money to pay for the same services they used to provide. Instead, they are cutting benefits for their residents and reimbursement rates for the doctors, hospitals and other providers who care for them. In some cases, the human toll of the cuts is obvious.

In Arizona, a state cut eliminated Medicaid coverage for organ transplants, meaning that some of the more than 100 poor residents who are on waiting lists for new livers, lungs or kidneys could die because they can't afford the operations on their own. "You hold in your hands the lives of these men and women of Arizona," two of the state's Democratic members of Congress wrote last month in a letter to Republican Governor Jan Brewer, urging her to restore funding for the transplants.

In Illinois, the state simply has stopped paying its bills anywhere close to on-time, becoming a "deadbeat" in the eyes of those who do business with state government. Pharmacists who rely on the state for Medicaid payments have received none, and some face bankruptcy or are considering not filling prescriptions for Medicaid patients anymore, potentially leaving their clients without access to routine health care. Others cannot consider that possibility because their business depends almost entirely on the low-income Medicaid populations their pharmacies serve.

"Seventy five percent of our business right now is either directly or indirectly tied to Medicaid," says Tom Hebermehl, a pharmacist who has owned an independent drug store in Paris, Illinois, for 44 years. "If we say we can't do Medicaid anymore, we're out of business."

In other states, including Nevada and Texas, lawmakers have studied the ramifications of abolishing Medicaid altogether. That's a prospect that used to be considered unthinkable, and would leave hundreds of thousands of people without health insurance at the precise time that the new federal health care law, which is being challenged in the courts, seeks to expand coverage.

Few areas exempt from cuts

While Medicaid represents the biggest recession-related shift in state spending, it is far from the only area where states are trying to save money. Virtually every function of state government has seen its funding slashed in the past few years.

In Missouri, some public defender offices — the last form of legal assistance to those who cannot afford private attorneys — have stopped accepting new cases because they are overworked and understaffed. In California, the term "Furlough Fridays" has become vernacular as driver's license centers and other state offices have regularly shut their doors one day a week to save money. The state's renowned system of higher education has been hit hard, too, resulting in tuition increases of 32 percent that provoked mass protests on campus.

One of the most consistent growth areas in state spending — corrections — also has seen a major reversal of course, as lawmakers recognize they cannot continue to build expensive prisons for an ever-swelling inmate population. Instead, many states are rethinking sentencing policies to punish lower-level offenders without putting them behind bars. The shifting dynamic is one of the reasons that state prison populations declined in 2009 for the first time in nearly 40 years. According to NASBO data, general-fund spending on corrections dropped by 6 percent from fiscal year 2008 to 2010.

Even K-12 education — usually the last thing elected officials want to cut — saw general-fund spending decline 7 percent in the same period, although some of that decline was offset by new federal funds. New Jersey school districts have laid off thousands of teachers because of state-level cuts to the K-12 education budget, and the relationship between the state's largest teachers' union and the governor, Republican Chris Christie, is openly hostile. Hawaii resorted to teacher furloughs and four-day school weeks last year to stave off mass layoffs, drawing criticism from the state's most famous son: President Obama.

A national survey of nearly 700 school districts in 44 states found that nearly half have laid off personnel for the current school year, and two-thirds expect to do so next year. While many teacher layoffs are the result of local choices, widespread state cuts to municipalities have exacerbated the problem.

State workers, meanwhile, are going through a fundamental shift in their contractual relationship with their employers. No longer is a defined-benefit pension plan guaranteed, as states face a $1 trillion shortfall in what they have promised their retirees and what they have on hand to pay those obligations. Dozens of states are shifting more of the retirement funding burden to employees and even retirees themselves. Colorado, Minnesota and South Dakota are asking current retirees to pitch in more for their benefits — a cost-cutting move that prompted immediate lawsuits in all three states, where retirees contend the states are reneging on promises they made years ago.

While the prospect of a reliable pension check is no longer guaranteed, neither is a state job. Hiring freezes are common across much of the nation, and tens of thousands of state-level positions have been eliminated.

"You need a cop. You need a nurse. Otherwise you have a pretty high bar to get over (to be hired by the state)," says Ellen Jane Schneiter, commissioner of the Maine Department of Financial and Administrative Services. Schneiter notes that Maine's state government is 1,000 positions smaller now than it was in 2003. Nationally, state government employment has shrunk to below pre-recession levels and is likely to decline further this year.

Even those who do not rely on their state government for health care or education, meanwhile, are feeling the effects of the recession, in the form of higher taxes. More than half the states have raised taxes in the past three years, including more than $40 billion in new revenue raised over the last two years alone.

What lies ahead?

With Republicans winning control of a majority of governor's offices and statehouses in the November elections, 2011 is shaping up as a year of more budget-cutting. That's due not only to an aversion to more taxes but also the coming end of federal stimulus dollars, which begin to disappear this year. Already, most of the new governors who have been inaugurated have spoken of the need to make difficult decisions in the coming legislative sessions.

While cuts are certainly on the horizon, there are limits to what states can and will do to balance their budgets, fiscal experts say. Taxes are likely to go up again in some places, including Illinois, where lawmakers are discussing a 75-percent hike in the income tax. Borrowing is another option many states will likely turn to.

But many experts dismiss the notion that the states' financial woes are so severe that they will default on their loans. That hasn't happened since the 1800s but is increasingly being feared amid the mountain of unpaid bills.

"I don't expect any states to default on any loan," says NASBO's Pattison. "I cannot imagine an elected official who wants their legacy to be default, especially at the state level. What governor is going to want to be remembered for that?"

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