State budget gaps widening as economy slumps

John W. Schoen Senior producer • Profile • E-mail

As Congress and the White House have been working to calm financial markets and minimize damage to the economy, officials in statehouses around the country have been coping with their own gathering storm. The rapidly deteriorating economy has blown gaping holes in many state budgets that can’t be closed by borrowing money.

In recent weeks, the budget shortfalls have been growing more apparent. The result is an increasingly painful set of choices involving deeper spending cuts, increased taxes or both.

Governors, mayors and other advocates have made the rounds on Capitol Hill this week, proposing ambitious plans to build roads and water and sewer projects, extend jobless benefits and help states cope with multibillion-dollar  shortfalls.

New York Gov. David Paterson, a Democrat, pressed for help in closing a projected $12.5 billion gap caused in large part by the financial industry's meltdown. He said falling tax revenues will mean harmful cuts to in health care, anti-poverty programs and other state services.

"The cruel irony is that at the time when citizens need their state governments the most, state governments are least equipped to help them because of plummeting revenues," Paterson said. "When states are hurting, our national economy suffers."

New Jersey Gov. Jon Corzine, a Democrat and former chairman of Goldman Sachs, called for a deficit-financed stimulus measure tagged at up to 2 percent of the nation's gross domestic product — or about $300 billion — with a heavy emphasis on infrastructure projects such as road construction, railway repairs and water and sewer projects.

"This time of adversity should be translated into a time of opportunity with respect to our infrastructure projects," Corzine told the House Transportation Committee. "We should not lose the opportunity to invest in our future, our children and our grandchildren's future."

But governors and other officials aren't waiting for Congress to act. Those in the deepest financial holes have scheduled emergency legislative sessions to try to close the gaps.

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But state officials have limited leeway in cutting existing budgets. Unlike the federal government, most states are not permitted by law to borrow to make up for budget shortfalls.

“We haven’t even been through a political budget process yet that takes this fiscal crisis into account," said Donald Boyd, a senior fellow at the Rockefeller Institute who follows state budgets. "The last budget process was done before things were clearly getting horrible.”   

Among the hardest-hit regions are those where the housing market downturn has been most severe. Barely a month after California belatedly filled a $15 billion hole in its new budget, the state is looking at another $3 billion in red. Gov. Arnold Schwarzenegger, a Republican, has called the legislature back to Sacramento after the election to look for ways to balance the books.

Arizona Gov. Janet Napolitano also plans to sit down with that state's legislature in emergency session after the election to try to cope with more than $1 billion in red ink on the state’s recently enacted $9.9 billion budget. That budget already included $1.9 billion in cuts when it was enacted in June. State officials are estimating they may have to cut as much as $3 billion in next year’s budget.

“The plain fact of the matter is that the national economy, from which Arizona is not immune, took a turn that really has become kind of a perfect storm of events, and nobody really predicted that,” said Napolitano, a second-term Democrat. "So you have to deal with what you have.”

Because the cost of social services like education and health care make up a big part of most state budgets, those areas are among those most vulnerable to spending cuts. Some 17 states are cutting programs to help health care for low-income families; 16 states have cut spending on K-12 and early childhood education; and 17 states have cut spending on public colleges and universities, according to the Center on Budget Policy and Priorities.

Because they are generally not allowed to run a deficit, many states typically carry a “rainy day” fund to offset the risk of a shortfall. But those funds are not expected to cover the revenue damage from the storm battering the economy and financial markets.

“They’re never large enough to offset anywhere near the kinds of declines that states suffer when the economy goes bad,” said Boyd.

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