Weekly Wrap: Reports Spell Deep Trouble

The recession has cut so deep that state governments will suffer for at least 10 years – or what the National Governors Association bluntly calls “the Lost Decade.” That was among the conclusions in a trio of reports this week that should raise eyebrows over just how bad states’ finances have become.

“The bottom line is that states will not fully recover from this recession until late in the next decade,” Raymond C. Sheppach, executive director of the governors’ association, said in a statement accompanying a report the group issued Thursday (Nov. 12) with the National Association of State Budget Officers.

The two groups’ report – a preliminary study that precedes a full report to be released next month – found that, for the first time on record, states’ overall spending has declined in back-to-back years, shrinking 4.8 percent last fiscal year and at least 4 percent in the current fiscal year. The unprecedented spending drop is a reflection of sharp declines in state tax collections – including a 7.5-percent plunge last fiscal year – “from every revenue source.”

State revenues are likely to continue their downward trend “for another one or two quarters,” according to the report. Mark Zandi, chief economist at Moody’s Economy.com, has predicted that state revenues will not return to 2008 levels in real terms until fiscal year 2013, adding that national unemployment – which is closely tied to state revenues and hovered near 5.5 percent during the 2001-2007 period – will not descend to that level again until 2014. It is now at 10.2 percent, the highest in 26 years.

The states’ fiscal crisis has had plenty of real-world implications. Taxes and fees have increased by a record $24 billion, and half the states either have laid off or plan to lay off employees this fiscal year, according to Scott Pattison, NASBO’s executive director. Hawaii, for instance, will start laying off hundreds of state employees today (Nov. 13), the Honolulu Advertiser reported .

Another 13 states have drained their rainy-day funds, Pattison said, though he did not name those states.

Even though many experts believe that the national recession – which began in December 2007 – ended either in August or September of this year, the NGA and NASBO report is another reminder that the worst is yet to come for states. In past economic downturns, the report said, states’ toughest budget years have been the two years immediately after a recession is “declared over.” That’s because, by then, Medicaid rolls have swelled as more people lose their jobs and their health insurance, even as state revenues continue to lag.

In other words, governors and state lawmakers are likely to face enormous pressure and a host of unpopular choices, including even further tax increases and spending cuts, when they return to work next year – a major election year.

States’ fiscal challenges have led some advocates to call for a second federal stimulus package, noting that the funds steered to or through states in the initial $787 billion plan – amounting to about $247 billion – soon will run out.

The Center on Budget Policy and Priorities, a Washington, D.C., budget research group, on Wednesday (Nov. 11) issued its own report , calling for a second stimulus. Without more federal help, the CBPP report said, the spending cuts and tax increases states will be forced to enact could take a full percentage point off gross domestic product. “That, in turn, could cost the economy 900,000 jobs next year,” the group warned.

Zandi has joined in the center’s call for another round of federal stimulus, recently testifying before a congressional panel that more federal help – specifically for Medicaid and education – may be necessary.

But the idea of a second stimulus faces political obstacles. A partisan debate over the effectiveness of the first stimulus shows no signs of ebbing, and the federal deficit is huge and drawing increasing scrutiny from lawmakers in Washington, D.C., particularly as federal health care legislation moves forward. At an appearance at the Pew Center on the States in September, Edward DeSeve, President Obama’s special adviser on the recovery, declined to offer specifics about how the federal government would help the states after the stimulus runs out.

The governors’ organization has refrained from calling for more stimulus aid.

“There are probably some individual governors who are having conversations (about a second stimulus), but we do not have a consensus to request that,” Sheppach said during a news conference with reporters on Thursday (Nov. 12).

Despite the dire fiscal news across the nation, a third report – this one issued by the Pew Center on the States, of which Stateline.org is part – this week served notice that some states face far bleaker budget pictures than others during this recession.

” Beyond California: States in Fiscal Peril ” identified the nine states, after California, in the most immediate fiscal danger, based on six factors that contributed to the Golden State’s ongoing fiscal woes. Together, the nine states – Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin ­-­ and California account for more than a third of the nation’s population and economic output, and their fiscal troubles threaten the national recovery.