By Sujit CanagaRetna, CSG Fiscal Analyst
While states have weathered recessions before, the Great Recession, which began in December 2007, will likely wreck state budgets through the rest of the 2010 fiscal year and into the 2011 fiscal year. That likely will lead to permanent changes in state government finances and services.
The intensity of the fallout continues to deplete state coffers as revenue intakes sputter and expenses escalate. Tax collections for the second quarter of 2009 were down 16.6 percent from the same period in 2008; for the 2009 fiscal year, state tax collections plummeted by an average 9.2 percent, adjusted for inflation.
More alarming is that just three months into the current fiscal year, new budget gaps opened in 18 states, with more states expected to join the list. Cumulative budget shortfalls for the 2010 and 2011 fiscal years are forecast at a staggering $350 billion. Even though there are green shoots of growth emerging on the national economic horizon, state revenues notoriously lag the national recovery, so states are looking at a grim immediate future.
Given that this recession is the worst financial crisis to afflict the nation since the Great Depression, states have not faced revenue shortfalls of this magnitude. So not only has this Great Recession affected states more deeply, it will continue to do so for a longer period of time.
In preparing their budgets for the 2010 fiscal year, the gaping budget holes resulted in 41 states reducing services, including restrictions on eligibility of low-income children and families for health insurance or reduction in access to health care services in 27 states. In addition, at least 24 states slashed medical, rehabilitative, home care or other services needed by low-income elderly or people with disabilities, or raised the cost of these services. Twenty-five states either cut or proposed cuts in K-12 and early education; 34 states cut funding to public colleges and universities; and 42 states shrank the size or work time of state government employees.
In Arizona, for instance, the Department of Public Safety warned the agency could be reduced to 1997 staffing levels, officers could be forced into dangerous situations without backup and Arizonans could be forced to wait more than an hour for officers to respond to some emergency calls because of budget cuts.
In Kentucky, House Speaker Greg Stumbo said lawmakers may consider dipping into local school districts’ contingency funds to help balance the 2010-12 state budget. In Oklahoma, cuts to the state’s Office of Child Abuse Prevention are expected to eliminate services for about 180 families, while cuts by the Commission for Human Services will mean fewer funds will flow down to the Tulsa Area Agency on Aging, which will reduce its home-delivered meals by 50 percent. In Delaware, budget shortfalls are expected to severely constrain the ability of the state to provide employment assistance to those graduating from the Autism Delaware program.
Overall, the Great Recession and steep drop-off in state revenues will force state policymakers to try to shift voters’ expectations about what services and programs government can provide.
Despite the dour fiscal outlook, several states are pursuing aggressive strategies to rejuvenate their economies. One approach gathering momentum is a serious review of how states expect to finance the plethora of state government services and programs during and after the Great Recession.
California, Colorado, Kentucky, Nevada and West Virginia formed commissions or blue-ribbon panels to address such topics as the expansion of the state sales tax to cover services. A majority of states apply their sales tax to less than one-third of 168 potentially taxable services, even though the U.S. economy has moved away from the manufacturing sector to one dominated by the service sector. States are also looking at applying sales taxes more universally on Internet purchases, a category that has grown exponentially in recent years. Some states are relying more heavily on gaming revenue.
States have also resorted to borrowing extensively in recent years, taking full advantage of cheap and plentiful credit. For instance, a July 2009 Moody’s report documents that state net tax-supported debt in 2008 vaulted to nearly $417 billion, an increase of 4.8 percent from the prior year and a substantial increase from the approximately $75 billion recorded in 1988 and approximately $180 billion recorded in 1998. Of course, during the final quarter of 2008 and first quarter of 2009, state governments—like practically every other public and private entity—had trouble borrowing, but the severe credit freeze has thawed recently.
Unfortunately, there are no easy, permanent fixes in the short-term. States must develop a systematic and long-term investment strategy in education, pre-K through university and post-graduate research, to be truly successful in this brutally competitive, globalized, 21st century economy. This requires the vision and long-term commitment of policymakers at every level—the same thing that made the Research Triangle Park in North Carolina and the Silicon Valley in California successful.