Wall Street Ills Worsen State Fiscal Headaches

Report Read time:
Wall Street Ills Worsen State Fiscal Headaches

The turmoil on Wall Street is setting off warning bells in state capitols. The immediate casualty is the loss of millions of dollars in the value of states' pension funds and other investments, but a bigger fear of state officials is a prolonged financial crisis that further reduces already shrinking tax revenue.

Most states diversify their portfolios, which helps cushion the collapse of the investment bank Lehman Brothers Holdings Inc. and the federal takeover of giant insurer American International Group Inc. Of greater long-term concern to state officials, they say, is how events on Wall Street are tightening credit, threatening to slow down business and consumer spending.

If that continues, state tax revenues could plunge further at a time when more than half of states already are having trouble making ends meet because of the mortgage meltdown that began last year. Because every state but Vermont is constitutionally required to balance its budget, they have little maneuvering room. So at least 29 states have instituted some combination of spending cuts, hiring freezes, tax increases and borrowing to cover shortfalls.

“The impact on tax revenue is likely to be significant and damaging,” said Robert Ward, deputy director of the Rockefeller Institute of Government in Albany.

New York, which already projects a $22 billion budget gap over the next three years, would be hardest hit because the financial services industry is the largest in the state. According to some estimates, financial workers account for 20 percent of annual state tax revenues. Connecticut and New Jersey are also braced for a hit.

Besides suffering the budgetary effects of a national financial crisis, states will also face a regulatory impact. They will be forced to oversee the unwinding of AIG assets as it complies with terms of the $85 billion federal takeover. The nation's largest insurer gradually will sell off its insurance units to repay Uncle Sam over the next two years.

Read the full report Wall Street Ills Worsen State Fiscal Headaches on Stateline.org

America’s Overdose Crisis
America’s Overdose Crisis

America’s Overdose Crisis

Sign up for our five-email course explaining the overdose crisis in America, the state of treatment access, and ways to improve care

Sign up
Quick View
America’s Overdose Crisis

America’s Overdose Crisis

Sign up for our five-email course explaining the overdose crisis in America, the state of treatment access, and ways to improve care

Sign up

MORE FROM PEW

An aerial view of a vast wetland, with scattered vegetation visible on sandy islands. In Western Australia, a Conservation Model for the World
A presentation being given by a businesswoman to a group of participants at a business conference. Four Plan Features Can Boost 'Retirement Readiness'
A large group of people in formal or traditional attire stands together on a stage, with a digital background depicting marine life and the large text “WTO Agreement on Fisheries Subsidies.” WTO Needs to Redouble Its Effort on Fishing Subsidies
A man in a winter hat and sunglasses kneels on a rocky shoreline in front of a campfire, holding a metal mug with gloved hands. Behind him, in the water, a motorboat is moored to the shore. Cliffs rise on both sides of the water. Why Newfoundland’s South Coast Fjords Are Sacred
Composite image of modern city network communication concept

Learn the Basics of Broadband from Our Limited Series

Sign up for our four-week email course on Broadband Basics
Quick View

How does broadband internet reach our homes, phones, and tablets? What kind of infrastructure connects us all together? What are the major barriers to broadband access for American communities?

Pills illustration
Pills illustration

What Is Antibiotic Resistance—and How Can We Fight It?

Sign up for our four-week email series The Race Against Resistance.
Quick View
Pills illustration

Antibiotic-resistant bacteria, also known as “superbugs,” are a major threat to modern medicine. But how does resistance work, and what can we do to slow the spread? Read personal stories, expert accounts, and more for the answers to those questions in our four-week email series: Slowing Superbugs.