Tough choices for states during budget crisis

updated 6:48 p.m. ET July 31, 2008

SACRAMENTO, Calif. - Gov. Arnold Schwarzenegger is laying off as many as 22,000 state employees. New York's governor is raising the possibility of selling — or more accurately, leasing — the Brooklyn Bridge. Nevada is burning through its rainy-day fund like a gambler on a losing streak. And Maryland is pinning its hopes on slot machines.

With the economy in a slide and the housing market in crisis, states are collectively rolling up tens of billions of dollars in budget deficits in one of the worst financial crunches in the U.S. since the 1970s.

The startlingly rapid drop-off in tax revenue is forcing many states to make some hard decisions: Raise taxes? Cut programs and jobs? Dip into reserves? Borrow money? Lease or sell state assets?

"They're all terrible choices," Nevada Assembly Speaker Barbara Buckley said of the cuts her state made in a special session last month. "I believe we should never have to make these kinds of choices ever again."

Red ink to get deeper
Worse, economists say the red ink is only going to get deeper later in the fiscal year when 2008 tax returns start coming in.

"The big question is when will states hit the bottom? We don't know," said Arturo Perez, a fiscal analyst with the National Conference of State Legislatures in Colorado.

As of June, more than 30 states faced deficits totaling a projected $40 billion, or more than triple the gap of the previous year, according to the NCSL.

California, which still does not have a budget for the fiscal year that began July 1, is looking at a $15.2 billion deficit, an amount that dwarfs that of all other states. The next highest at the start of the fiscal year was New York's, at $5.2 billion.

California lawmakers are at odds over how to deal with the problem. The Democrats are proposing a combination of spending cuts and $8.2 billion in higher taxes. The Republicans oppose any new taxes but haven't come up with the spending cuts to close the gap.

In addition to eliminating up to 22,000 part-time and temporary jobs Thursday, Schwarzenegger imposed a hiring freeze and ordered that as many as 200,000 state workers receive the federal minimum wage of $6.55 an hour until a budget is passed — a move that is certain to be challenged in court, even though the employees will get their back pay eventually.

"I will not be able to pay my rent, buy food or put gas in my car to transport my children," said Roz Myers, a receptionist for a state agency who protested in front of the Capitol this week over the plan.

Among those facing the loss of their jobs are retired state employees who work under contract, temporary and part-time workers such as those who fill in at the Department of Motor Vehicles, seasonal employees and student assistants.

"Today I am exercising my executive authority to avoid a full-blown crisis and keep our state moving forward," Schwarzenegger said. "This is not an action I take lightly."

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