Grim State Budgets Could Mean $100 Billion Shortfall

by Mike Hall, Dec 16, 2008

The nation’s crashing economy and deepening recession is slamming states. A new report by the Center on Budget and Policy Priorities (CBPP) reveals that 43 states are, or will soon be, facing serious budget shortfalls, forcing them to cut vital services, lay off workers, deplete reserves or raise taxes. With this fiscal year only half over:

The outlook for state budgets remains grim. Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year—which started July 1 in most states. Now, their budgets have fallen out of balance again….And these problems are expected to continue into next year.

The CBPP study, State Budget Troubles Worsen, shows that economic indicators predict that the current recession will be far more severe that the 2001 recession where unemployment topped out at 6.3 percent. Today, it already has hit 6.7 percent and

many economists expect it to rise much further, which will reduce state income taxes and increase demand for Medicaid and other services.

The continuing credit crunch and housing crisis has reined in consumer spending and, in turn, depressed state sales tax revenue, along with local property taxes that many localities use to fund education and other services. CBPP reports that with most states’ constitutions forbidding deficit spending, many already have made significant cuts in services. Without federal financial assistance, more severe cuts are in store.

• At least 17 states have implemented or are considering cuts that will affect low-income children’s or families’ eligibility for health insurance or reduce their access to health care services. Programs for the elderly and disabled are also being cut.
• At least 15 states are cutting medical, rehabilitative, home care or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services.
• At least 16 states are cutting or proposing to cut funding for kindergarten to 12th grade and early education; several of them also are reducing access to child care and early education, and at least 21 states have implemented or proposed cuts to public colleges and universities.
• In addition, at least 20 states have proposed or implemented reductions to their state workforce. Workforce reductions often result in reduced access to services residents need. They also add to states’ woes by contracting the state economy.

Although the report does not call for a specific amount of federal aid for the states, it notes that for fiscal year 2009, states are $79 billion in the red, and in 2010, state budget shortfalls could reach $100 billion. Traditionally, the federal aid comes in two forms—an increase in the federal share of the Medicaid for low-income families and flexible block grants to states for other programs.

As part of its Main Street Recovery Program, the Institute for America’s Future suggests

spending $50 billion on state aid in the first year and increasing spending to $75 billion in the second. The most effective measures would split funds between flexible block grants for general revenue sharing (in order to prevent cuts in funding for education and other vital state programs), and a temporary increase in federal matching funds for Medicaid (in order to address the increase in demand for Medicaid and avoid cuts in health care that would lead to a sharp rise in the number of uninsured).

… aid to states has a relatively high stimulus impact per dollar spent, since the money is put to use immediately, and forestalls cutbacks and tax increases that would reinforce the downturn….Medicaid spending generates economic activity, including jobs, income and state tax revenues.

Assistance for states has been a key element of the AFL-CIO’s call for an economic recovery package since January, when we first urged Congress to move quickly to help the economy pull out of its tailspin. But even as the crisis worsened, the Bush administration and Senate Republicans refused to consider offering the states any fiscal relief.

Instead, they grudgingly went along with extending unemployment benefits for long-term jobless workers and approved a $750 billion bailout of Wall Street—but scuttled a bridge loan for the nation’s automakers that would have offered some relief for Main Street.

Click here for the full report from CBPP.

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