State Government Shutdowns: A Dangerous Game to Play

In early July 2005, artillery massed on the Iowa side of the state’s border with Minnesota, ready to move across the boundary line. To some, it may have been a menacing sight. But Hawkeyes and Gophers weren’t on the brink of war. Instead, the stalled shipment of military supplies — intended for a Minnesota National Guard camp — was the victim of a budget stalemate taking place in St. Paul.

That year, Minnesota lawmakers failed to complete work on the state budget before the July 1 start of the fiscal year, leading to a partial government shutdown. For a few days, thousands of public workers stayed home as the state ceased many non-essential functions. One result: Permits couldn’t be issued for trucks carrying oversized loads. That’s why the weapons were stuck on the Iowa state line.

The story of the stalled weapons shipment reflects the broad and sometimes unpredictable consequences when a state doesn’t pass a budget on time. Those consequences are on the minds of quite a few legislators across the country right now. Only about half of the states have budgets enacted for the 2012 fiscal year that begins July 1. States breathed a sigh of relief when the federal government agreed this spring to keep its own budget funded until October, knowing that a federal shutdown would have been disruptive to state operations. Now, they’re being forced to contemplate something far more disruptive to state business: Shutdowns of state governments themselves.

If history is a guide, only a handful of states will end up failing to pass a budget by July 1, and of these, most will likely approve stopgap measures to avert shutdowns. But as of now, situations in several states look pretty intractable.

Minnesota gridlock

In some state capitols, this sort of protracted budget battle is virtually unheard of. That’s especially true in states with part-time legislatures where the length of legislative sessions is strictly constrained. When South Dakota says that its session will last 40 days or fewer, it means it. The South Dakota legislature adjourned in March with its budget work done. Many other states, though, typically wait until close to July 1 — or beyond it.

Lawmakers like to wait because it allows them to work with the latest revenue forecasts for the next year. They also wait because only the pressure of a deadline forces antagonists to stop grappling for political leverage and find common ground.

This year, Minnesota seems closest to a genuine crisis. Governor Mark Dayton said last week there was a “strong likelihood” of a government shutdown. On the surface, Minnesota might seem an unlikely place for bitter combat. The state hasn’t fared particularly poorly in the recession and its aftermath — its unemployment rate is currently 6.5 percent. It hasn’t been the scene of the epic clashes over public employee benefits that have engulfed many of its Midwestern neighbors.

But Minnesota has all the ingredients for a fiscal fight. Partisan control is divided: Dayton is a Democrat, while the legislature has Republican majorities. The budget is in bad shape — Minnesota’s shortfall this year is one of the deepest in the country as a percentage of its budget — guaranteeing that lawmakers will need to make unpopular spending cuts or tax increases or both.

The disagreement between Dayton and the legislature is over the fundamentals of the budget: How much the state should tax and how much it should spend. Dayton ran on a platform promising a large income tax increase for the rich, while Republican legislators have taken to wearing pennies on their lapels to symbolize that they won’t accept even one cent more in taxes on anyone. 

“There’s a very deep philosophical divide between the parties,” says Tom Hanson, who was a top aide to Tim Pawlenty, Dayton’s Republican predecessor. “Right now, the legislative Republicans are advocating not just no new taxes, but no new spending beyond the budget they introduced.” Dayton has scaled down the tax increases he’s seeking, but the sides are still $1.8 billion apart.

The arguments in Minnesota are almost the same as the ones that opposing lawmakers have been making in California, Nevada, New Jersey and North Carolina in recent weeks. Each state has a large budget shortfall. In each case, Democrats have wanted to raise taxes or extend recent tax increases that are set to expire, and Republicans have opposed that. And in each of the states, any deal must include both Democrats and Republicans because power is divided. Compromises have taken shape in Nevada and North Carolina, but they remain far off in New Jersey and California.

Not every state with a budget stalemate fits this pattern. In Louisiana, the arguments have been between Governor Bobby Jindal and his fellow Republicans in the state House of Representatives who favor an even more austere budget than the governor proposed. In Illinois, Governor Pat Quinn has complained that his fellow Democrats in the legislature cut too much, though he hasn’t signaled whether he’ll veto their budget.

In Iowa, there’s a different twist: The state actually has money in reserve, but that hasn’t made finding common ground much easier. The Democratic majority in the Iowa Senate objects to Republican Governor Terry Branstad’s plan to hold education spending flat. Iowa has little history of waiting to the last moment to pass a budget — the tardiest budget in memory was finished a few days before the start of the fiscal year in 1992 — but this year there have been some rumblings of a shutdown.

Revenue recovery

Minnesota, Iowa and California, however, are outliers. One might guess that the recession and its aftermath would be a major source of budget delays and threatened shutdowns, but the fact is that with all of the vexing budget choices states have faced since the recession began, only one state government actually has shut down since the financial collapse — Michigan in 2009. (The shutdown lasted for just two hours.) 

Typically, late budgets have been more common in bad fiscal times, but that hasn’t been true recently. Last year, only three states — California, Pennsylvania and New York — failed to pass a budget by the start of their fiscal year, down from nine the year before. This year is looking as though it will be more similar to 2010 than 2009, with few states going into budget overtime.

One reason is that the revenue picture in most states is improving — up to a point. According to the Rockefeller Institute of Government, year-over-year state tax collections have now been increasing for five consecutive quarters, though revenue still isn’t up to pre-recession levels. In lots of states revenue isn’t just up, but also beating forecasters’ expectations.

New Jersey will be a good place to watch this dynamic at work in the coming weeks. There, the state Supreme Court ruled last month that the state had to pony up $500 million more for poor school districts to meet its constitutional obligations to fund education. That decision would have burst a big hole in the budget — one that would have been difficult to fill given Governor Chris Christie’s pledge not to raise taxes — except that just days earlier, the revenue forecast increased by over $500 million. 

There are still deep divides between Christie and the Democratic majorities in the legislature, but the extra revenue could facilitate a deal. “I don’t think there will be a shutdown or any threat of a shutdown this year,” says Deborah Howlett, president of New Jersey Policy Perspective.

The trouble that California and Minnesota face is that they still have large budget holes — and consequently loud budget debates — despite the fact that their revenue forecasts have been revised upward. Even in those states, however, there will be considerable pressure for a deal. 

That will be particularly true for legislators in Minnesota who remember the tumult of the 2005 shutdown, when the state faced everything from canceled West Nile virus testing to closed highway rest stops. A shutdown this year would be even more disruptive because Dayton has signed the budget for only one small agency, the Department of Agriculture, whereas in 2005 many more pieces of the budget were in place before the July 1 deadline. While fewer than 10,000 Minnesota state employees were sent home from work in 2005, this year around 35,000 are expected to receive layoff notices.

Those dire consequences are the best reason for optimism that budget compromises will be reached, even in Minnesota. Lawmakers invariably face political anger when they fail to complete their most basic task. No one wants to be responsible for headlines about howitzers stuck on the Iowa border. “They want to get these things done,” says Scott Pattison, executive director of the National Association of State Budget Officers. “I sense that when I talk to state legislators. They really don’t want to go past the state deadline.”