Economy to Dominate Govs’ Meeting

A stream of troubling financial news out of state capitols shows why the sputtering economy is sure to pervade talks among the nation’s governors as they meet in Washington, D.C., this weekend.

A growing number of state budgets are bleeding red ink. Looming deficits just forced the governors of California, Minnesota and Arizona to order hiring freezes. Michigan recently suspended a state loan program, one of the first victims of the credit crunch. Rescue plans for mortgage holders in danger of losing their homes are on state drawing boards in Florida and other states.

The official agenda of the National Governors Association’s Feb. 23-25 winter meeting is jam-packed with sessions devoted to “securing a clean energy future,” the initiative of NGA Chairman and Minnesota Gov. Tim Pawlenty (R).

But budget woes – and the inevitable buzz of presidential politics in the most volatile election year in recent history – no doubt will stand out as themes of this year’s meeting, which also commemorates NGA’s 100 ^th anniversary.

In a sign of how the economy is growing as an election issue, state budgets from all but a handful of energy and farm states are feeling the pain of a sluggish national economy and mounting defaults in home mortgages. And analysts predict that the state budget picture is liable to get worse as the year goes on.

State budgets are being slammed by a triple-whammy: consumers and businesses are spending less so state tax revenues are dipping; a new bond-market crisis could make it more expensive for states to borrow; and the recent stimulus package Congress approved to jumpstart the economy actually will hurt state coffers. All but a few states tie their state tax rates to the federal system and could lose as much as $5 billion from Congress’ decision to give extra depreciation allowances to businesses, lowering their taxable income.

By NGA’s last count, 18 states must cut $14 billion to keep this year’s budgets in balance, and 18 states already know they’re running $32 billion short in the upcoming fiscal year. If the current downturn follows the path of previous recessions, 35 to 40 states could face budget cuts in 2009, NGA Executive Director Raymond Scheppach said in a Jan. 28 column for Stateline.org. That’s largely because of a lag before economic effects show up in states’ revenues. Deficits are a far greater problem for states because, unlike the federal government, they must make cuts or even raise taxes to balance their budgets.

California’s budget deficit is $1.5 billion bigger than it was just a month ago, totaling $16 billion. In New York, the prospect of lower tax collections from Wall Street bonuses and weak home sales is making it tough to close an estimated $4.8 billion gap.

Budget experts say today’s stalled economy is bleak but hopefully won’t spiral into a national recession as in 2001. Then, states had to close $264 billion in budget gaps over five years, forcing states to dip into their rainy day funds, cash out their tobacco settlement money and cut back programs such as dental care for poor people and road construction projects.

Still, many states are bracing for their own economic situation to get worse before it gets better. History shows that even after the national economy starts to turn around, states still struggle. Lost jobs translate into more people turning for health care to Medicaid, the state-federal program serving 59 million poor Americans. Governors are worried that their Medicaid rolls and costs could be going up even as new Medicaid rules from the Bush administration are expected to deprive states of $13 billion in federal help over five years.

The Medicaid changes are expected to be one point of contention when governors meet with President Bush and members of his Cabinet at the White House on Monday (Feb. 25.) The governors later are to meet privately with Ben S. Bernanke, chairman of the Federal Reserve.

Governors also are expected to press for a second stimulus package from Congress that would target $12 billion specifically to help states cover expected shortfalls. NGA’s proposal seeks $6 billion to help states pay for Medicaid and another $6 billion in a block grant for states to use to help communities, ranging from new construction projects, which generate jobs, to help for homeowners facing default on their mortgages. Congress sent the states $20 billion in 2003 as part of an economic package to help states recover from the 2001 recession.

Overlaying governors’ policy concerns are unsettled political issues – not on the official agenda – stemming from the presidential race, particularly on the Democratic side.

Ten of 28 Democratic governors are still uncommitted in the tight primary race between U.S. Sens. Hillary Clinton of New York and Barack Obama of Illinois. So far, 10 governors have endorsed Clinton and eight are backing Obama. But of intense interest to all Democratic governors would be how they and other party officials who are “super-delegates” to the Democratic convention intend to vote if super-delegates were needed to break a tie in choosing a Democratic nominee.

As super-delegates, governors will have to decide whether to vote as their state voted in primaries or caucuses or exercise their own judgment, an issue that could be raised privately.

Neither Obama nor Clinton is expected to be on hand because they’ll be campaigning for primary votes in Ohio and Texas. But Republican governors will meet with the presumed GOP presidential nominee when U.S. Sen. John McCain of Arizona headlines a dinner Saturday (Feb. 23) for the Republican Governors Association.

Insiders expect private conversations to be abuzz with talk of which governors might make the vice-presidential shortlists, providing balance on a ticket with U.S. senator.

On the Republican side, Minnesota’s Pawlenty was one of McCain’s first supporters and has been rumored for the No. 2 spot or a Cabinet pick. Others include Govs. Charlie Crist of Florida, Sonny Perdue of Georgia, Haley Barbour of Mississippi and Jon Huntsman Jr. of Utah.

Among Democrats, Virginia Gov. Tim Kaine was one of the first governors to endorse Obama, now considered the frontrunner. Other Democratic governors who are considered potential Obama running mates are Arizona Gov. Janet Napolitano and Kansas Gov. Kathleen Sebelius.

If Clinton gets the nod, she has 10 governors in her corner who might be Cabinet or VP material, including Pennsylvania Gov. Ed Rendell, former chairman of the Democratic National Committee and a prolific fundraiser, and Ohio Gov. Ted Strickland.