Capitol Comments

‘Great Recession’ Still Wrecking State Budgets

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.

States Borrowing to Avoid Spending Cuts

State governments have avoided some painful spending cuts by borrowing at some of the lowest interest rates in years, according to USA Today.

The newspaper reported last week that even some of the most cash-strapped states are taking advantage of the increased flow of credit at low interest rates. USA Today reports California borrowed $8.8 billion last week at interest rates of 1.25 percent to 1.5 percent for debt due by June 30. That's about one-third the interest rate it paid a year ago.

Short-term interest rates for governments hit a record low of 0.56 percent recentlyfor debt due in 13 months or less, according toThe Bond Buyer, a newspaper that tracks public finance. Rates on 20-year bonds fell to 3.79 percent, the lowest level since 1967, according to USA Today.

In Louisiana, Rainy Day Fund Debate Continues

Like many other states battling the current economic recession, Louisiana is dealing with falling revenues to the tune of a $1.3 billion decrease in the state’s general fund revenue forecast for the 2009-2010 budget, according to The Times-Picayune of New Orleans.

To dig out of that hole, the state can take money from the rainy day fund, known formally as the state’s Budget Stabilization Fund.

And the latest reports indicate Louisiana Gov. Bobby Jindal wants to dip into the state’s rainy day fund, according to The Times-Picayune.

The newspaper reported Jindal said he’s willing to sign a budget that takes $50 million from the rainy day fund to finance higher education. But, Jindal said he would require that the $50 million be replenished using state’s planned tax amnesty program, the newspaper reports.

Facing Budget Woes, Colorado Passes Economic Development Bills

Even though Colorado faced a nearly $1.5 billion budget shortfall this year, the state didn't give up on pursuing economic development measures.

In fact, at a time when the state’s tax revenues are coming in much lower than expected and there’s just less money to go around, many in Colorado argue that now is the most important time for economic development.

Todd Saliman, director of the state’s Office of Planning and Budget, is one of those believers.

“One of the things that we put a lot of effort into this year is focusing on economic development and trying to provide incentives for job creation—and Colorado has been limited in the amount of incentives it could offer to potential businesses that were wanting to locate in Colorado just because of our budget constraints,” Saliman said in an interview with State News.

Learn How States Are Using Stimulus Money

Want to keep track of how states are planning for and using the stimulus money in the American Recovery and Reinvestment Act? You'll want to bookmark STATERECOVERY.org, a service of The Council of State Governments to help states work through the $787 billion package.

States are dealing with an unprecedented economic crisis and will be using the federal spending initiative in part to bolster state budgets.

STATERECOVERY.org will provide states with a comprehensive overview of the federal legislation as well as ongoing updates and analysis of how states are preparing to implement this historic legislation. The Web site will provide critical information for key policymakers at the state, local, tribal, territorial and federal government levels for determining funding eligibility and ensuring effective implementation.

The Council of State Governments has partnered with the notable firm Latham & Watkins, LLP in the development of The American Recovery and Reinvestment Act of 2009: A Guide for State and Local Governments, a user-friendly tool to help states determine their funding eligibility under the economic recovery act.  The new Web site also includes the results of a nationwide survey on how individual states and territories are preparing to respond to the economic package.

CSG WASHINGTON UPDATE: Stimulus Vote Expected, States Need to be Ready to Act

By Chris Whatley, CSG Washington, D.C., office director

It has come down to three votes.

With Massachusetts Sen. Ted Kennedy out of town and the Minnesota Senate race between Norm Coleman and Al Franken in limbo, passage of the largest spending bill in the history of the United States requires the support of at least three Republican senators in order to move forward. Nevada Sen. Harry Reid has abandoned his goal of securing 80 votes for the package and appears committed to holding a vote later today if the three senators, and their moderate Democrat counterparts, can be brought on board.

Moderate Republicans have joined with several moderate Democrats (including former CSG President Nebraska Sen. Ben Nelson) to form the so called “Gang of 18” which is working to develop a floor amendment to trim more than $100 billion from the economic recovery package.  These cuts will likely include substantial reductions in the estimated $112 billion in flexible state fiscal relief included in the bill. If the moderates can reach agreement on spending cuts the bill could squeak through with the 60 votes needed to overcome the threat of a filibuster sometime later today.

What Makes a Public Pension Plan Healthy?

By Mary Branham Dusenberry

Keith Brainard, research director for the National Association of State Retirement Administrators, said much is made about the funding levels of public pensions and their relation to the overall health of those plans.

“Underfunded is a matter of degree, not kind,” Brainard said. “The fact that a plan is underfunded is not in itself problematic.”

He said there are several other key factors in determining whether a pension plan is healthy. One key factor is the demographics of the plan.

Patterson Moves to Trim New York Pensions

New York Gov. David A. Patterson on Tuesday proposed scaling back his state’s public pension plan.

Patterson’s plan, part of an austere state budget, would:

States Consider Changing Pension Plans

By Mary Branham Dusenberry

Several states have shifted from a defined benefits pension model to a defined contribution plan for public employees.

Alaska was the first state to make the change, but it’s a trend more states are considering, according to Sujit CanagaRetna, senior fiscal analyst for The Council of State Governments’ Southern region, the Southern Legislative Conference.

“It’s less onerous; it’s less of a financial responsibility for the states,” CanagaRetna said. “At the same time, people are going to be more nervous about investing in the market.”

In 2005, Alaska was facing a nearly $6 billion shortfall in its pension fund. In an effort to stop the bleeding, the legislature passed a bill to move any state employee hired after July 1, 2006, from the defined benefits plan, which would pay a guaranteed income after retirement, to a defined contribution plan, which, like a 401(k), is based on employee and employer contributions over the years.

Ignored Fundamentals Led to Housing Crisis, Recession

By Mikel Chavers

Breaking the basic underwriting fundamental in the housing industry led to a country in financial turmoil—a bona fide recession.

That’s according to the speakers who focused on the mortgage meltdown and its continuing aftershock at the Financial Services Working Group session Dec. 4 during The Council of State Governments annual meeting. And, according to Michael Greenberger, former director of trading and markets of the Commodity Futures Trading Commission and one of the speakers, the fuse that lit the explosion “was the concept that it would be profitable to get people into houses who otherwise could not demonstrate credit worthiness to get into a house.”

That’s the basic fundamental that was ignored time and time again, the speakers reiterated.