States Begin the Dirty Work of Balancing Budgets

By Dawn Handschuh, Personal Finance Writer Archive

From California, to the New York Island
From the redwood forest, to the Gulf Stream waters
This land was made for you and me.

In the squares of the city, in the shadow of the steeple
Near the relief office, I see my people
And some are grumblin' and some are wonderin'
If this land's still made for you and me.

⎯ Woodie Guthrie

During the Dust Bowl days of the 1930s, Woodie Guthrie and thousands of other Oklahomans migrated to California, looking for work. Many of his songs, like the one above, reflect on the harsh economic conditions of the times.

While today's recession shares massive bank failures and a stock market nosedive with the economic downturn of 1929, we likely won't see adverse economic conditions rivaling those of the Great Depression.

Still, the cash-depleted coffers of states and municipalities are forcing lawmakers to make hard decisions to balance their budgets as depreciating real estate values and escalating foreclosures reduce property tax revenue. Sales and income tax revenues have also been affected as consumers reduce their spending and some suffer job losses.

According to the Center on Budget and Policy Priorities (CBPP), new budget shortfalls have reappeared in 21 states that already slashed spending, raided reserve funds or increased fees to balance budgets for the current fiscal year, which began on July 1 in most states. (States cannot run a deficit, unlike the federal government.)

While a few mineral- or oil-rich states, like New Mexico, Alaska and Montana, have been minimally affected by the recession, CBPP Senior Fellow Elizabeth McNichol said, many states have already made deep cuts in services.

"At least 14 states have implemented or are considering cuts that will affect low-income children's or families' eligibility for health insurance," said McNichol. "Programs for the elderly and disabled are also being cut. At least 11 states are cutting medical, rehabilitation, home care or other services needed by low-income people who are elderly or have disabilities," she added.

At least 13 states may cut K-12 and early education, and at least 17 states have implemented or proposed cuts to public colleges and universities, McNichol continued.

Finally, at least 19 states have or may reduce state workforces.

"Budget cuts," McNichol warned, "often are more severe in the second year of a state fiscal crisis, after reserves have been largely depleted and thus are no longer an option for closing deficits."

Elsewhere:

California
Governor Schwarzenegger and legislators traded jabs in a lengthy budget battle that was finally settled three months into the fiscal year, largely through accounting maneuvers and hopeful revenue projections that some observers say are just postponing the problem. Schwarzenegger had warned the U.S. Treasury that his state might need to borrow $7 billion in an emergency short-term loan to cover day-to-day operations.

Maine
After projecting a $500 million budget gap in the state's 2010-2011 two-year budget, Maine's governor directed all state departments to come up with a 10% spending reduction. One money-saver to be discussed is limiting the number of bills that can be submitted and shortening legislative sessions, which reportedly cost $40,000 to $50,000 a week.¹

New York
New York's governor has called for a special legislative session to deal with a potential $1.2 billion budget shortfall brought about by a huge drop in business taxes paid by the state's largest banks through September. And while personal income taxes, which make up two-thirds of the state revenue, matched projections, the state anticipates acute revenue losses from January though March 2009. This period follows Wall Street's bonus season; the financial services sector is responsible for more than 30% of fourth-quarter revenue for the state. The state is projecting a 43% decline in financial sector bonuses, a 35% decrease in capital gains tax collection on profits from the sale of stock or other assets, and the loss of 40,000 financial services jobs.²

Pennsylvania
Just two months into its new fiscal year, Pennsylvania revenue is already $118 million shy of projections, and lawmakers have asked the governor to reopen the 2008-09 budget to cut spending. The governor imposed a state hiring freeze and called for an end to most out-of-state travel by state officials, which lawmakers say are only a good first step.³

Utah
Lawmakers made a 3% across-the-board cut in every agency except public education. Cuts totaling $272 million included Medicaid funding, the arts and programs for disabled people. The Highway Patrol and the state prison system won't fill vacancies, while other jobs will be eliminated.⁴

Virginia
Legislators must deal with an estimated $2.5 billion shortfall. The governor, who can unilaterally reduce spending up to 15%, has proposed $324 million in spending cuts, 570 layoffs, postponing pay raises for public employees and raiding the state's "rainy day" fund of $400 million.⁵

Footnotes

¹ "Lawmakers Will Face Tough Budget Cuts," Kennebec Journal, 10/13/08
² "Governor Paterson Calls for Nov. 18 Special Session to Close Potential $1.2 Billion Current-Year Budget Shortfall; Proposes Accelerated 2009-10 Budget Process to Proactively Address Next Year's Deficit," New York State Division of Budget press release, October 3, 2008
³ "Some Pennsylvania Lawmakers Demand Budget Cuts," The Patriot News, September 18, 2008
⁴"Lawmakers Approve $272 Million Budget Cut," AOL News, September 26, 2008
5"General Assembly Lawmakers Predict More State Budget Cuts," WSLS10, October 11, 2008