Stateline Story

Amid Fiscal Uncertainty, States Prepare for Cuts

The stock market's nosedive, the downgrade of the federal government's credit rating and the recently approved congressional debt deal - with its deep cuts in domestic spending - all bode poorly for the states, which are preparing for the likelihood of more fiscal pain in the near future.

Washington Governor Chris Gregoire has asked state agencies to prepare for spending cuts of as much as 10 percent when the legislature reconvenes in January, The (Olympia) Olympian reports .  Gregoire, as Stateline has noted , already has spent years cutting the budget, and in a memo circulated by her budget director on Monday (August 8), she suggested to state workers that she sees more bad news on the way.

"Part of the key to fighting this recession is to continue working to get ahead of it," Gregoire's memo said. "For every two steps forward in the recovery, it seems we are taking one step back. Though our revenue collections have continued to show slight improvement this biennium, our near-term outlook has weakened."

In California, the state pension fund has lost $17 billion on the stock market since the new fiscal year began July 1 - including a stunning $6 billion on Monday alone, The Sacramento Bee reports .

But that may not be the biggest fiscal problem that state leaders face. The sharp decline in the markets also threatens to upend California's new budget, since the state's revenue system relies heavily on capital gains and high-income earners. The budget that Governor Jerry Brown signed on July 1 assumed $4 billion in rosy revenue assumptions, so a steeper drop in personal income tax collections would force far deeper cuts than the administration anticipated.

Meanwhile, many states are watching to see whether their own credit ratings will be downgraded after Standard & Poors took the unprecedented step of downgrading the federal government on Friday (August 5). The worries are particularly pronounced in states such as Maryland and Virginia, where the economy is closely tied to the federal government. "The next 90 to 120 days I think are very, very critical for Virginia," Governor Bob McDonnell's finance secretary tells the Richmond Times-Dispatch .

The paper notes that S&P will soon determine how, and whether, state and local credit ratings will be affected by the downgrade of the federal government.