Depressed Economy Wallops States

Staggered by turbulent financial markets and anxious about a rapidly slumping economy, many state governments are slashing their budgets, frantically trying to stay afloat.

After two years free of major fiscal worries, state policymakers in 2008 were hit by a triple-whammy: a Wall Street meltdown that made it more difficult and costly to borrow; a record number of home foreclosures that took a big bite out of tax revenues; and soaring oil and gas prices that squeezed budgets of all but the energy-producing states.

With calendar 2008 nearing an end, Stateline.org’s annual state-by-state review of major accomplishments finds lawmakers girding for big spending cuts in 2009 and beyond. California and Massachusetts were so worried about paying their monthly bills in October they considered asking the federal government for loans.

Stateline.org has compiled state-by-state session summaries of the 48 legislatures that met this year. (Montana and North Dakota did not meet.) Click here to see our review>.

The year began with governors unveiling bold proposals that went nowhere as the housing market tanked and the economy deteriorated. Most notable, perhaps, was Republican California Gov. Arnold Schwarzenegger’s sweeping health-care reform plan – an early casualty of California’s budget troubles. Proposals to expand health care insurance in Illinois , Missouri, New Mexico and Pennsylvania also fell by the wayside because of the faltering economy.

In New York, which stands to lose $1 billion in tax revenue on the Wall Street meltdown alone, lawmakers will consider in a Nov. 18 special session whether to pare back a far-reaching plan enacted earlier this year to use state money to cover nearly 400,000 additional children through the state’s Children’s Health Insurance Program. The state pushed the idea after the Bush administration last year said they were ineligible because these children’s families earned too much.

On the education front, Arizona Democratic Gov. Janet Napolitano’s plan to give free tuition to every Arizona child who graduates from high school with a B average also fell victim to a shortage of funds. Pre-kindergarten programs took a hit in Tennessee and Virginia, paid family leave was victimized in Washington and a popular voter-approved plan to shrink the number of students per classroom is getting renewed scrutiny in Florida because of the costs.

The budget crisis is coinciding with a historic election-year for the White House that features candidates with experience from the ranks of state government. Democratic presidential candidate Barack Obama served in the Illinois legislature while Republican candidate John McCain has Alaska Gov. Sarah Palin as his running mate.

The millions of new, first-time voters who registered so that they could cast ballots for president could also make a crucial difference in governors’ races in Indiana, Missouri, North Carolina and Washington. And political control of at least 10 legislative chambers could easily turn over.

With a new occupant of the White House, states hope to fare better on a host of issues that President Bush or Congress has blocked, including immigration enforcement, new, more secure driver’s licenses, global warming, children’s health insurance and the No Child Left Behind education law. But the next president will be hard-pressed to find the money for what the states want while paying for wars in Iraq and Afghanistan and the $700 billion Wall Street bailout.

States patch deficits with tax hikes, four-day work weeks

The housing slump that started in 2007 started crimping state budgets in 2008. As people bought fewer homes, states got less real-estate and sales tax revenue. Sales taxes shrank because most people who buy homes also purchase appliances, carpeting and other big-ticket items. The vacation and retirement destination states of Arizona, California, Nevada and Florida were hit particularly hard.

Many states were forced to dip into rainy day funds, freeze hiring and delay projects to plug deficits of more than $40 billion in fiscal 2009 budgets that for all but four states began July 1. The shortfall was triple the $13 billion they weathered a year earlier.

The cuts had widespread impact. California laid off 10,000 part-time and temporary state workers. Ohio shut down two mental health facilities. Rhode Island dismantled a two-year-old program that provided discounted electricity and heating oil to the poor. New Jersey rescinded property tax breaks and unsuccessfully attempted to charge small municipalities for state police patrols. Maine charged adults enrolling in Medicaid a $25 fee. And in Georgia, some library branches were set to close and some fire departments postponed plans to buy new fire trucks after the state cut local funding.

And cuts weren’t always enough. Tax increases, always a last resort for lawmakers, were levied in a handful of states and more could be coming since states are required to balance their budgets.

Minnesota legislators overrode Gov. Tim Pawlenty’s (R) veto to hike the state’s gasoline tax by 8.5 cents a gallon to raise road and bridge funds in the wake of last year’s deadly Minneapolis bridge collapse. Nebraska lawmakers overrode Gov. Dave Heineman’s (R) veto and raised the state’s gasoline tax by 1.2 cents. And Arkansas lawmakers voted in a special session to increase its natural-gas severance tax, the first such tax hike since 1957, to 5 percent of the market value of the gas.

Maryland adopted a new tax on millionaires, and Illinois raised the sales tax in the Chicago area to keep public transit agencies in the black. New Hampshire, New York and Massachusetts all upped their taxes on cigarettes.

Maine voters Nov. 4 will get to decide whether to keep or overturn the Legislature’s recently-enacted law that doubles the excise raise on beer and wine, with the money directed to the state’s health insurance program, called Dirigo.

Looking for new revenue sources, New York became the first to require online retailers like Amazon that do not have a physical presence in the state to collect sales taxes from state residents. Amazon.com is challenging the law in court.

States also economized in other ways. Utah Gov. Jon Huntsman Jr. (R) ordered a four-day work week for 17,000 of the state’s 23,000 employees. Florida, Indiana, Kentucky, New York, South Carolina and Washington also switched some employees to shorter work weeks. Connecticut closed state buildings at night and on weekends to save energy costs. Vermont ended its legislative session two weeks early, saving the state $1 million.

Nevada’s budget woes were so bad that the state cut funding for school textbooks and roads, capped enrollment in children’s health care and cut back on bodyguard protection for the state’s first lady.

But other ideas to generate much-needed cash went down in flames. The governors of New Jersey and Pennsylvania both pushed the idea of privatizing state assets or adding tolls to state roads, but these efforts collapsed after voters objected. The governors of Kentucky and Massachusetts both wanted to bring casino gambling to their states, but their legislatures balked.

Mother Nature added to state budget havoc. This summer’s floods in the Midwest hit Iowa hard, but also affected Illinois, Indiana, Iowa, Minnesota and Missouri. And the aftermath of Hurricane Ike could dent Texas’s projected $1 0.7 billion budget surplus over the next two years. Priced out of private insurance, most coastal homeowners turned to cheaper, state-backed insurance. The Texas Windstorm Insurance Association was deluged with claims that could cost as much as $2 billion – a big bill even in a mineral-rich state that is better off financially than most states.

Before the hurricane, Texas was among a dozen states spared economic pain. States that produce oil, gas or grain benefited from high energy and commodity prices. North Dakota, for example, had a $740 million surplus largely because of oil and agriculture production. But even states with comfortable cushions are concerned about the economy. Some Montana lawmakers said they don’t expect to have its current $1 billion state budget surplus when they convene for the 2009 session in January.

The credit crunch made it harder for states to borrow while the stock market dive wiped out billions in state investments. Another round of deep cuts is currently under way in California, Connecticut, New York, Massachusetts, Maryland, Pennsylvania and Virginia, among others.

Cash-strapped California still makes history

The fiscal crunch didn’t stop states from making legislative history. Always a trail-blazer, California became the first in the nation to encourage housing construction near workplaces and public transportation to curb suburban sprawl and reduce air pollution. The measure is seen as a step to meet an historic 2006 state law that promises to reduce greenhouse gas emissions by 25 percent by 2020.

In other precedent-setting actions:

• California became the first state to prohibit restaurants from using artificial trans fats and will require fast-food restaurants to post the calorie and nutritional content of menu items. The aim is to reduce obesity.
• New Jersey became the first state to require parents to get health insurance for their kids, but there’s no punishment for those who don’t.
• Colorado embarked on a “preschool-to-college” educational system designed to give students the skills needed for college.
• Sun-splashed Hawaii became the first state to require all homes be built with solar water heaters.
• Massachusetts agreed to a first-in-the-nation plan to manage development of its waters as a wind, wave and tidal energy resource. The Bay State became second, after California, to require development of a low-carbon fuel standard for vehicles that would reduce greenhouse gases by 10 percent. And it became the first to exempt non-food-based biofuels from state gas taxes. Its goal is to provide an incentive for developing alternatives to ethanol. A growing concern with corn-based ethanol is that it raises food prices and that processing and transportation cause more environmental harm than gasoline.

And for the first time, 10 Northeastern states in September held the nation’s first auction of pollution credits aimed at curbing global warming.

Modest changes in health reforms

While a push toward universal health care failed in several states, modest gains were made elsewhere, although it remains to be seen whether they will survive legislative cost-cutting in 2009.

Maine’s Democratic-led Legislature expanded its groundbreaking health care program for the uninsured. Iowa lawmakers approved Gov. Chet Culver’s (D) initiative to expand health insurance for children, with the goal of covering all children by 2010. Colorado made 50,000 more children eligible for Medicaid and the state’s health program for kids. And Florida created a new health insurance plan that allows private firms to join the state program “Cover Florida” in offering low-cost, no-frills coverage to uninsured state residents 19 to 64.

However, Connecticut Gov. M. Jodi Rell (R) vetoed a bill that would have made hers the first state to let nonprofit agencies, municipalities and some small businesses join the state health insurance pool. She said the faltering economy made it too costly.

New Jersey followed California and Washington state in requiring employers to give workers up to six weeks of paid leave each year to care for family members. However, Washington has delayed implementation.

Also noteworthy was that July marked the first anniversary of Massachusetts’ deadline for most residents to sign up for health insurance or face a penalty. Mo re people enrolled the state’s historic health care plan than expected, costing the program more than was budgeted. Costs during the first year climbed to $625 million, up from estimates of $472 million. More than 439,000 previously uninsured people either enrolled in private or subsidized health insurance since the program began, the state announced.

Health worries over childhood obesity also led at least five states – Arkansas, Florida, Oklahoma, Texas and Virginia – to boost the time school kids must spend either at recess or in gym class.

And despite tight budgets, 32 states increased spending on pre-kindergarten programs, according to Pre-K Now, which advocates universal preschool. (Pre-K Now is funded by the Pew Charitable Trusts, which also funds Stateline.org).

Mortgage crisis draws new state regulation

While the federal government tried to jump-start the economy with $600 rebate checks to individual taxpayers, Ohio, Florida and Vermont passed their own economic stimulus packages, using pension funds, bond money and tax credits to try to revive businesses.

A few states also tried to help struggling homeowners, particularly those with “subprime” adjustable-rate loans that became unaffordable once interest rates jumped. A new Virginia law, for example, requires lenders to give homeowners in danger of default a month’s delay before foreclosure, while New York grants a three-month reprieve.

In all, 29 states passed 66 bills related to mortgage licensing, often to establish or tighten licensing standards for mortgage brokers, according to the National Conference of State Legislatures (NCSL).

Four states – Kentucky, Maryland, Utah and Washington – established mortgage fraud as a crime. At least seven states and Washington, D.C., enacted new laws to curb foreclosure-rescue scams by banning some unscrupulous lending practices. Maryland enacted what is now the toughest statute – banning all mortgage-rescue transactions that require a homeowner to sign over a deed.

Gay rights, abortion top among social issues

In the biggest social policy development of the year, courts in California and Connecticut gave same-sex couples the right to wed. They join Massachusetts in legalizing gay marriage.

The volatile issue will once again be in play on Election Day, but not like in 2004, when gay marriage bans were on 11 states’ ballots . McCain supports a California ballot measure to ban gay marriages, while Obama is against overturning the judicial action. Voters in Arizona and Florida also will be asked to decide Nov. 4 whether to prohibit gay marriage.

On the abortion front, two more states added an ultrasound imaging requirement to their abortion laws, bringing the total to 16, according to the Guttmacher Institute, a research organization promoting abortion rights. Oklahoma’s provision, which requires doctors to show an ultrasound image to all women seeking an abortion, is the strictest of its kind in the country.

Nebraska this year became the last state in the nation to pass a so-called “safe haven” law designed to protect unwanted infants by allowing parents to legally surrender them at a hospital, but state officials have already vowed to change the law in 2009.

The state was thrust in the national spotlight after the law took effect July 18 because its law, unlike any other in the country, allowed parents to give up a minor of any age – possibly an unruly teenager – instead of just infants. The result was that parents abandoned 19 children to the state, including teenagers and children from other states.

States also made efforts to combat racial hatred. Connecticut, Louisiana and New York made it a crimeto display a hangman’s noose to try to intimidate or harass. The measures came in response to several high-profile incidents, most notably in Jena, La., where display of a noose in 2007 unleashed racial violence at a high school and escalated into the nation’s largest civil-rights demonstration in years.

Florida became the sixth state to offer an official apology for slavery. The Legislature also changed the words of Florida’s official song, “Old Folks at Home,” to eliminate reference to “darkies.”

And the issue of evolution figured in a debate over an “academic freedom” bill signed by Louisiana’s Gov. Bobby Jindal (R). The law allows the teaching of points of view that contradict scientific research on such topics as global warming and creation. Critics say it’s a backdoor way to bring religious beliefs into the classroom.

Emotions run high over immigration proposals

A federal-state dispute over rules to make driver’s licenses more secure ended anti-climactically in March when the U.S. Department of Homeland Security gave states – even those that didn’t seek it – more time to comply with the federal Real ID law. So it will be up to the next president and Congress to resolve cost and privacy issues raised by the states, which are required to verify the identities of the nation’s 245 million drivers.

In an outgrowth of the flap, Maine became the third state this year (with Oregon and Michigan) to stop issuing licenses to undocumented immigrants. That means only four states – Hawaii, New Mexico, Utah and Washington – now give illegal immigrants driving privileges .

Frustrated with federal inaction on the estimated 12 million undocumented immigrants in this country, states continued to take enforcement into their own hands. Missouri, Mississippi, Utah and South Carolina joined a growing list of states to impose new requirements on employers to check the identities of job applicants.

Arizona tightened a law enacted last year prohibiting businesses from knowingly hiring illegal immigrants. The state also made it a felony to offer vacant properties, called drop houses, to smugglers who keep immigrants there until they are paid for getting them in the country.

Global warming tops environmental concerns

States continued to outpace the federal government in fighting global warming.

New coal-burning power plants, in particular, are receiving scrutiny because of greenhouse-gas emissions. The Republican-dominated Kansas Legislature failed to overturn Democratic Gov. Kathleen Sebelius’ decision to block construction of a new coal plant. Plans for such plants have been challenged in 24 states in the wake of a 2007 U.S. Supreme Court decision tightening federal regulation.

Wyoming lawmakers, meanwhile, established a legal framework to allow companies to store carbon-dioxide gases underground, where the emissions from coal-burning plants won’t contribute to the greenhouse effect that could lead to climate change.

Delaware and New Hampshire agreed to join a New England regional effort – similar to others in the nation – to cut emissions through a “cap-and-trade” system that lets polluters either cut greenhouse gases or buy credits from companies that have exceeded requirements.

Connecticut imposed across-the-board caps on the amount of carbon dioxide the state will emit by 2020. California, Hawaii, Massachusetts, Minnesota, New Jersey and Washington state already agreed to comprehensive limits on the carbon dioxide they’ll release.

Michigan approved a sweeping energy law, which aims to increase the state’s use of clean and renewable energy. But the measure is controversial because it allows electric utilities to avoid market-based reforms, while letting the companies raise rates to pay for new production facilities.

And on the environmental front, eight Great Lakes states forged an agreement that would prevent people outside the Great Lakes basin from taking lake water. Congress ratified the agreement, and President Bush signed it into law.

Politics and scandals mark 2008

States played a huge rule in juggling the 2008 presidential primary calendar in a bid to give their voters a greater say in choosing the presidential nominees. But delegates in several states paid the price. Michigan and Florida Democrats nearly lost their ability to seat delegates at their national convention in Denver Aug. 25-28 for holding primaries too early, but at the last minute were given the green light. The GOP was tougher. Florida and Michigan, New Hampshire, South Carolina and Wyoming were allowed to bring only half of their delegations to Minneapolis-St. Paul for the Republican convention Sept. 1-4.

And while a governor didn’t win either party’s nomination, sitting New Mexico Gov. Bill Richardson (D) and former Arkansas Gov. Mike Huckabee (R) and former Massachusetts Gov. Mitt Romney (R) competed in the primaries.

Gov. Palin was thrust into the national spotlight when Republican John McCain chose her as his vice presidential running mate. Palin’s role in the dismissal of Alaska’s public safety commissioner then became a campaign issue. A state legislative panel found in October that Palin abused her power, but didn’t break any laws.

Looking ahead to future presidential elections, Hawaii, Illinois and New Jersey joined Maryland in enacting laws that seek to ensure that the winner of the popular vote wins the Electoral College vote. The governors of Rhode Island and Vermont vetoed similar measures.

Scandal also shaped the political landscape. New York Gov. Eliot Spitzer and Ohio Attorney General Marc Dann, both Democrats, resigned in disgrace after Spitzer was caught using the services of a prostitute and Dann became mired in a sexual harassment investigation.

Illinois Gov. Rod Blagojevich (D) had to fend off calls for impeachment, even from members of his own party because of his ties to Tony Rezko, a top Blagojevich fundraiser and confidante, who was convicted on corruption charges. The breakup of Gov. Jim Gibbons’ (R) marriage became a public issue in Nevada when his estranged wife refused to move out of the governor’s mansion.

A St. Louis-area lawmaker resigned from the Missouri House after pleading not guilty to felony charges of having sex with the 14-year-old daughter of a state employee. And in Pennsylvania, 12 current and former House members and staffers were indicted in July for what a grand jury alleged was “a concerted plan to use taxpayer funds, employees and resources for political campaign purposes.”

Stateline.org staff writers Stephen C. Fehr, John Gramlich, Christine Vestal, Daniel C. Vock and interns Daniel Petty and Nathaniel Weixel contributed to this report.