(Ca.) State budget now caught in financial crisis

The state will be hard-pressed to pay its bills next month for critical needs from teacher salaries to nursing home services unless Congress promptly acts to calm the nation's fiscal storm, state Treasurer Bill Lockyer warned today.

Lockyer said the national crisis threatens to exhaust California's reserves by late this month. Congress thus far has been unable to agree on a $700 billion Wall Street rescue plan.

Tuesday, September 30, 2008

States act to cushion Wall Street meltdown

By Pamela M. Prah, Stateline.org Staff Writer

Cascading economic problems flowing from the crisis on Wall Street are forcing states to urgently redraw their financial blueprints for the rest of this year and next to cushion the impact of the credit squeeze, staggering paper losses for millions of ordinary Americans and soaring energy prices.

California, which just ended a record 85-day budget impasse, fears its newly-approved plan to balance its books is already $1 billion in the red. Utah cut most state agency budgets by 3 percent in a Sept. 24 special session, and Oregon Gov. Ted Kulongoski (D) has rescinded a 3.2 percent pay raise for agency directors in his state.

In New York, the epicenter of the financial cataclysm, Gov. David Paterson (D) is laying the groundwork for a special legislative session to deal with conditions that he expects will add $1 billion to the state’s $6.4 billion deficit. New York, along with New Jersey and Connecticut, will be hard hit by the layoffs of thousands of financial industry employees – by some estimates, the financial sector accounts for as much as one-fifth of their revenues.

“The feeling in the states is that this is going to be a tough fiscal 2009, and 2010 is looking difficult,” said Scott Pattison, executive director of the National Association of State Budget Officers.

The tidal wave of bad news comes on the heels of an already brutal budget year that forced states to dip into rainy day funds, implement hiring freezes and put off projects to collectively plug deficits of more than $40 billion in their fiscal 2009 budgets — triple the $13 billion shortfall they weathered the previous year.

Here’s a rundown of recent state action to deal with the financial emergency:

* Florida: Lawmakers moved $672 million from reserves to chip away a projected $1.5 billion deficit for this year. That’s on top of the 4 percent cut Gov. Charlie Crist (R) imposed on all state agencies a day after he signed the new budget.

* Hawaii: Gov. Linda Lingle (R) postponed selling $625 million in bonds, saying the state would get a better deal waiting. Some analysts expect the national downturn to lead to a recession in Hawaii as tourism has been hit hard.

* Massachusetts: Gov. Deval Patrick (D) is mulling a special session and wants the Legislature to give him broader authority to make emergency budget cuts because tax collections are running $200 million less than a year ago.

* Maryland: Gov. Martin O’Malley (D) has directed state agencies to look for budget cuts of up to 5 percent to make a dent in a projected $1 billion deficit by 2010. The governor also is banking on voters Nov. 4 endorsing a ballot measure to legalize slots, a move that proponents say would bring the state $500 million.

* Missouri: The turbulent credit market has prompted the state to drop its one-of-a-kind plan that would have combined the design and construction of 800 bridges into one contract.

* Pennsylvania: Gov Ed Rendell (D) directed state agencies to reduce spending and eliminate out-of-state travel with the aim of cutting $200 million from this year’s budget.

* Virginia: Facing an estimated $3 billion deficit over two years Gov. Tim Kaine (D) plans to start cutting next month and legislators will review the cuts in January.

Many states are still reeling from the effects of the housing slump, particularly Arizona, California, Nevada and Florida, states that rely heavily on real-estate taxes. A drop in home sales and prices mean states get a smaller cut — of sales as well as real-estate-related taxes — because most people who buy homes also purchase appliances, carpeting and other big-ticket items.

The Wall Street meltdown not only makes it harder for states and consumers to borrow, but also is decimating many people’s investments, which further worsens state budgets. People worried about their shrinking 401(k) accounts will skimp eating out in restaurants, hold off extravagant spending and thus pump less tax revenue into state coffers.

High food and gas prices also have prompted consumers to tighten their belts. States are projecting lower sales tax collections, which account for about one-third of state revenue. Deficits are a nightmare for states because, unlike the federal government, they must make cuts or raise taxes to balance their budgets.

“States are in a world of hurt,” said Steve Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees.

States also are watching the unemployment numbers, which also have a fiscal policy impact. When people lose jobs, they lose employer-sponsored health insurance and often turn to Medicaid, the state-federal health program that serves 59 million needy. Over the last year, the national unemployment rate rose 1.4 percentage points to 6.1 percent, the highest level in five years. An Urban Institute study this year estimated that a 1 percentage point increase in the national unemployment rate makes Medicaid rolls bulge by 1 million and ultimately cuts 3 percent to 4 percent from state revenues.

“You can just imagine budget directors slapping their hands to their foreheads and asking `what will happen next?’” said Nick Johnson, state fiscal project director for the Center for Budget Policy and Priorities, a Washington, D.C, think tank that tracks policies that affect the poor. His organization estimates in a new report that at least 15 states have gaps in fiscal 2009 budgets enacted as recently as three months ago.

Even energy-producing and farm states that have been rolling in dough are wary the good times might end. “We’re going to sit tight,” said Pam Sharp, director of North Dakota’s office of management and budget. The state is closely monitoring consumer confidence. “If people’s wallets take a hit, they won’t feel like spending their money and our sales tax collections go down,” she said.

The budget crisis coincides with an election year in which 44 states will choose legislators.

Of all the states, New York will be hardest hit as 20 percent of its revenue comes from Wall Street. Paterson has also suggested that New York City be the headquarters for any new federal program created to handle the meltdown. “Headquartering the program here will create some new jobs for the financial sector and in some small way help mitigate the effects of this crisis,” Paterson said in letters to federal officials.

In nearby Connecticut, where many residents commute to Wall Street, Gov. Jodi M. Rell (R) announced Sept. 22 that the state’s budget deficit has more than doubled in a month, increasing to more than $300 million. “As Wall Street goes down, our deficit is going up,” she said in a statement. “We already are looking for places to make additional cuts.”

Amid the gloominess, New Jersey Gov. Jon S. Corzine (D) has rejected calls from state lawmakers of both parties for a special session. Corzine, a former Goldman Sachs CEO, said in a statement the state has been “very fiscally responsible,” noting that earlier this year the state cut hundreds of millions of dollars in spending and is paying down $600 million of debt. New Jersey also cut the state workforce by 3,000, eliminated two state agencies, made deep cuts to hospitals and municipalities, and Corzine signed an executive order limiting the state’s future spending.

Rather than trim spending, Corzine reiterated the Democratic Party’s call on Congress to approve a second national economic “stimulus” package that would give states billions of federal dollars to help pay for health care for the poor and repair or build bridges, roads and other infrastructure. While the U.S. House Sept. 26 approved a second stimulus package that would give states more federal funds for Medicaid, a similar deal failed in the Senate. President Bush also has opposed such a package.

The first comprehensive look at how many states are looking at additional red ink will come later this year when the National Conference of State Legislatures releases results of its 50-state survey. “Right now we just don’t know,” said NCSL budget specialist Arturo Perez.

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