States Plug Budget Holes, For Now

This year’s state legislative session will go down as one of the most brutal in recent memory as the national recession forced lawmakers to find money to cover a staggering $215 billion in estimated budget gaps for 2009 and 2010 – the equivalent of more than $700 for every man, woman and child in the country.

Even with the federal stimulus package dumping billions of dollars into the states, California, Kentucky, Nevada, New York and Washington are among states that struggled with the largest deficits in modern history. California, by far, faced the biggest challenge – a whopping $26 billion gap – that forced the state to slash $15 billion in basic services, including program funds for K-12 education and health care for the poor, and to divert some $4 billion from local jurisdictions.

Stateline.org’s 2009 Legislative Review is an exclusive look at major developments in state capitols as the country enters the second year of a national recession.

Click here for Stateline.org’s online package that includes state-by-state reviews detailing how states handled budget deficits and the federal stimulus package; the trends developing in key areas, such as education and health care; notable new legislation; and a chart of completed sessions and political control.

While most statehouses have shuttered their doors for the year, newly emerging budget shortfalls caused by less-than-anticipated revenues will force many legislatures to reconvene to balance their budgets as required by law. The question is just how big the new holes will be. At least half the states already are running in the red less than a month after their new budgets began July 1. Arizona, Connecticut and Pennsylvania could not agree on a 2010 budget plan by July 1 and are still working to complete them. Michigan, the only state that begins its fiscal year Oct. 1, also is trying to close a budget shortfall.

Some states enacted the largest tax increases in recent memory to balance their ledgers while others made deep cuts, slashing budgets for prisons, mental health and higher education. Many states found short-term patches to plug holes, laying the groundwork for even bigger problems in the coming year, particularly when the federal stimulus money starts drying up.

Several of the new state tax hikes, for example, are temporary, including higher sales taxes in California and Nevada and heftier personal income taxes in Hawaii, New York and New Jersey. Illinois turned to another short-term fix by borrowing $3.5 billion to pay its pension obligation. Minnesota put off payments to school districts. California raided $2 billion from local governments to balance its books.

Stateline.org’s annual review of all 50 states found much of the 2009 legislative session was spent frantically trying to patch budget holes with a windfall of federal stimulus dollars that many weren’t sure how to tap. All but North Dakota and Montana had budget gaps when drafting their current 2010 budgets. Even with an infusion of an expected $49 billion in stimulus funds during the year, states were forced to take dramatic measures to balance their ledgers for 2010:

• At least 18 raised personal income and/or state sales taxes, with seven states levying higher taxes on those in upper-income brackets;
• At least 18 will collect more revenue in cigarette and/or alcohol sales;
• Some 35 states cut higher education spending or increased tuition;
• At least 26 states slashed funding to prisons, including seven that reduced spending by more than 10 percent and another seven states closed prisons entirely;
• 17 forced state employees to take furloughs or unpaid leave, affecting more than 830,000 employees, and at least six offered state employees buyouts;
• At least four states are forcing Medicaid patients to pay more for their care, and at least eight states cut optional benefits under Medicaid, the joint federal-state program that provides health coverage to more than 60 million low-income people;
• Seven sought new gambling revenue, including Delaware, which this fall will join Nevada as the only states to allow sports betting. Ohio approved some 17,500 slot machines at race tracks, and Illinois added video poker at bars.

States are trying to balance their budgets at a time when state and local sales tax collections experienced their worst decline in 50 years and demands for state services are up dramatically as laid-off workers and struggling families seek unemployment benefits, food stamps and health care.

Budget deficit estimates change constantly and vary depending on the organizations tracking them. The National Conference of State Legislatures figures states had to confront deficits of $142.6 billion when they were drafting fiscal 2010 budgets, but at the same time, lawmakers had to erase $72.9 billion in red ink in their 2009 budgets. At least $60 billion of deficits are looming in 2011, but that number will likely grow.

The National Association of State Budget Officers and National Governors Association put total state deficits at $230 billion between fiscal 2009 and 2011. And the Center on Budget and Policy Priorities estimates states plugged $275 billion in gaps during 2009-2010 and predicts budget gaps for the next two fiscal years – those already mostly closed for 2010 and those projected for 2011 – to total at least $350 billion.

The fiscal outlook is so bad for most states that even Republican governors, loath to raise taxes, bucked the tide of their national party and accepted – and sometimes suggested – tax increases. Mississippi Gov. Haley Barbour, a former national GOP chairman and tobacco lobbyist, agreed to a 50-cent tax increase on a pack of cigarettes, for the first hike in nearly 25 years, and a hospital tax.

Other Republican governors who had to accept tax increases include Arnold Schwarzenegger of California, M. Jodi Rell of Connecticut and Charlie Crist of Florida. One of the sticking points in the ongoing budget impasse in Arizona was Republican Gov. Jan Brewer’s insistence that the sales tax be raised, much to the dismay of the GOP-controlled Legislature.

The federal recovery money helped states avoid draconian cuts, but few programs were spared. California, Michigan and Utah ended adult dental coverage for low-income people. Virginia closed 18 highway rest stops, and Arizona closed six state parks two days a week. Colorado, Kansas, Michigan, New Jersey, New York, North Carolina and Washington shut down prisons. California’s budget eliminates state funding for new textbooks for five years.

But at the same time, recession-weary lawmakers in 14 states managed to boost health care coverage for children, and at least nine states expanded programs for prekindergarten-age children.

Budget cuts felt widely

Americans, already distressed by rising unemployment rates and decimated savings investment plans, are feeling the impact of state budget actions far and wide.

Some 40,000 poor people were cut from Washington state’s basic health care plan, and another 29,500 poor adults lost coverage when Minnesota eliminated a program for individuals who don’t qualify for Medicaid. Fewer poor people in New York will be eligible for free cancer screenings because of budget cuts. And 30,000 legal immigrants will be cut from Massachusetts’ health care plan – despite the state’s ambitious goal of universal health care.

California, Connecticut, Georgia, Illinois, Michigan, New York, South Carolina and Tennessee were among states that made significant cuts to mental health programs.

Some 10,000 children in Illinois may not be able to go to preschool after the budget for prekindergarten programs was cut by 10 percent. California cuts may shorten its school year by five days. And in Hawaii, fewer students will be able to participate in school sports as athletic departments there got 65 percent of what they had in the last fiscal year. The $100 billion in the federal stimulus package for schools over the next two years helped many legislatures avoid severe education cuts, but shortfalls were too deep to avoid cuts for schools in California, Idaho, Illinois, Kansas, Nevada, Utah and Washington.

Drivers will pay more for gas in Oregon, Rhode Island and Vermont, and heftier vehicle registration or car rental fees are on tap in more than a dozen states. Cigarette smokers in a dozen states will see higher prices. New Jersey, New York and North Carolina increased both tobacco and alcohol taxes.

Businesses, travelers and motorists also will have to shell out more. Electricians, plumbers, funeral directors and Christmas-tree growers in Washington state will pay more for their licenses. Travelers to Hawaii, Indiana and Nevada will see higher hotel taxes. At least nine states hiked court fees to bring in more revenue. In Florida, for example it now costs $100 more for those seeking to adopt a child and $25 more for those caught driving 15 miles per hour over the speed limit. Massachusetts imposed a one-time satellite dish tax.

In Oregon, a voter-approved plan to impose longer prison sentences on those who commit property crimes was delayed by state lawmakers who said they could not pay for it. Tennessee’s department of corrections will save money by offering inmates less milk and meat in their daily meals. In Michigan, which has had the country’s highest unemployment since 2006, the budget picture is so bleak that the small town of Standish is hoping to import prisoners from California – or maybe Guantanamo Bay – to keep a local state prison in business.

States targeted online shopping as a source of tax revenue. New York was finally able to implement a law enacted last year that requires certain companies to collect sales taxes on goods bought over the Internet. (Amazon and Overstock challenged the law in court and the case in on appeal). This year, North Carolina and Rhode Island passed similar measures.

Kentucky Vermont, Washington and Wisconsin all expanded the sales taxes to certain digital products, such as software and cell phone ring tones in Kentucky and online music in Washington. Tennessee extended the sales tax to software maintenance contracts.

State employees, once thought to have the most secure jobs with the best benefits, are being furloughed, or forced to take unpaid days off in at least 17 states. California’s furloughs are the nation’s harshest, with about 210,000 state workers losing three days each month until June 2010. Another 9,000 state employees in six states took early buyouts. Nearly 80,000 Pennsylvania state workers went unpaid for more than a month amid a state budget impasse.

The federal stimulus package blunted many cuts in health care programs because Congress threatened to withhold $87 billion in Medicaid money from states that had toughened eligibility standards and application processes they had on July 1, 2008. That meant some states like California and South Carolina had to roll back newer policies that cut people from their Medicaid programs.

A few states were able to cut, not raise, taxes. Maine, North Dakota and Vermont reduced income tax rates. North Dakota was so flush that lawmakers gave themselves and state employees a 5 percent pay raise and approved $400 million in income and corporate tax cuts. Montana and Wyoming cut property taxes.

California not alone with budget woes

This year’s budget debacle in California overshadowed similar budget showdowns in Arizona, Connecticut, Illinois, North Carolina, Ohio and Pennsylvania, but experts say the Golden State’s dilemma could be a precursor of the fiscal headaches yet to come as states weather the longest recession since World War II.

California’s Schwarzenegger (R) and the Democratic-controlled legislature finally agreed to a controversial plan to close the state’s monstrous shortfall, after voters in May rejected a plan that would have allowed the state to borrow $5 billion from future lottery profits and extended for another two years the temporary 1-cent sales tax increase approved earlier in the year. State finance officials already are projecting a $7 billion to $8 billion shortfall for the next fiscal year.

New York, pummeled by Wall Street’s implosion, is bracing for deficits expected to climb to $6 billion over the next year after it closed a $17.7 billion budget hole this year by raising income taxes on the rich and imposing a variety of hefty fees on state services.

Even states that have been largely spared from the recession are being forced to make cuts. Idaho reduced year-over-year funding for elementary and secondary education for the first time in its history. Energy-rich Wyoming trimmed its budget for the first time in at least 20 years as it financial forecasts sobered.

Worse is yet to come

State leaders began the year knowing that the country was officially in a recession, but few could predict how dire their fiscal predicament would be.

In the current recession – now 19 months long and still going – states have tackled greater budget shortfalls than they faced in the five years it took them to recover from the last national recession after the 2001 terrorist attacks, according to NCSL data.

While 2009 is grim, states worry 2010 and beyond will be even worse. Even if the national recession ends this year as many predict, the outlook for states is bleak. State fiscal conditions historically lag behind national economic recovery. The year after a recession ends is typically when state budgets are hit hardest, because by then, Medicaid rolls have swelled with the higher numbers of the unemployed who have lost their health insurance.

Many state leaders also predict serious budget trouble when the flood of federal stimulus money ends in 14 months. At least six Republican governors came under fire for turning back a small portion of their stimulus share for fear of trouble funding new or expanded programs after the stimulus money runs out. Most of the $275 billion that states will receive from the $787 billion package will be spent in fiscal 2009, 2010 and 2011 budgets, with fewer dollars available in fiscal 2012.

See Related Stories:
Reports: Bleak state budgets through 2011 (6/4/2009)
State budget gaps top $200 billion; fees, tax hikes in the works (4/24/2009)
Downturn creates state spending ‘czars’ (4/9/2009)
Tracking the recession – Much ado about a small stimulus pot (4/6/2009)
Tracking the recession: Stimulus holds states accountable (3/3/2009)
Govs split over expanding jobless benefits (2/26/2009)
Stimulus to ease, not fix, state budget woes (2/14/2009)
Depressed economy wallops states (10/24/2008)
2007 marked by activism (12/31/2007)
Surpluses, social issues mark 2006  (12/26/2006) 

– Stateline.org staff writers Stephen C. Fehr, John Gramlich, Christine Vestal, Daniel C. Vock, Pauline Vu and interns Emily Kimball, Kimberly Leonard, Tony Romm and Rob Silverblatt contributed to this report.