State Budgets: Serious, Ridiculous, Ugly

by John Rubino on June 23, 2010

This week the focus shifted from Europe, where (apart from the French World Cup team) things are quiet, to the US, where state budget deadlines are forcing some tough, and occasionally bizarre, choices. Time Magazine’s cover, for instance blares “The Broken States of America”. An excerpt:

… Almost no one — and no place — is exempt. Nearly everywhere, tax revenue plummeted as property values tanked, incomes dwindled and consumers stopped shopping. Falling prices for stocks and real estate have made mincemeat of often underfunded public pension plans. Unemployed workers have swelled the demand for welfare and Medicaid services. Governments that were frugal in the past are just squeaking by. Governments that were lavish in the good times, building their budgets on optimism and best-case scenarios, now risk being wrecked like a shantytown in an earthquake.

How the Money Ran Out
For the first time in four decades of collecting data, the National Governors Association (NGA) reports that total state spending has dropped for two years in a row. In hard-hit Arizona, for example, the state budget has sagged to 2004 levels, despite blistering growth in population and demand for government services. Starting with the 2008 fiscal year, state governments have closed more than $300 billion in cumulative budget gaps, with another $125 billion already projected for the coming years, says Corina Eckl, fiscal-program director at the National Conference of State Legislatures (NCSL). Similar figures aren’t collected for the nation’s counties, villages and towns, but when the National League of Cities surveyed mayors recently, three-fourths of them described worsening economic conditions.

Accustomed to the ups and downs of the ordinary economic cycle, elected officials and budget planners are facing something none of them have experienced before: year after year of shortfalls, steadily compounding. Ordinarily, deficits are resolved mostly through budgetary hocus-pocus. But the length and depth of the recession are forcing governments to go beyond sleight of hand to genuine cuts. And that makes lawmakers gloomy in all but a handful of states. (It’s a swell time to be North Dakota.) According to an NCSL survey, worry or outright pessimism is the reigning mood in the vast majority of capitals.

And here’s a brief look at how some states are dealing with their deficits, starting with California:

A three-way stalemate over California’s budget

Budget, budget, who’s got a budget?

The governor has a state budget that his fellow Republicans more or less support. Assembly Democrats have a budget whose centerpiece is a complex scheme to borrow billions of dollars. And Democratic senators have a budget that’s based on raising taxes and shifting some programs from the state to counties.

Democrats control the 10-member, two-house conference committee that’s supposed to be reconciling all three budgets into one version that would be placed before the entire Legislature. They have the votes to do it. However, the committee has been going through the budget page by page for more than two weeks without settling any big issues and only some little ones. It’s now in hiatus after repeatedly hitting a political wall, unable to proceed because it doesn’t know how much money it has to spend.

That’s because the two Democratic versions of the budget are very much at odds, even if they both agree on rejecting Gov. Arnold Schwarzenegger’s slash-and-burn approach to closing a $19.1 billion deficit. It’s a three-way stalemate, with the new fiscal year due to begin next week and with state Controller John Chiang warning that the state will run out of cash this summer if a new budget is not in place.

Nothing will happen until Democrats in both houses are in sync on whether to borrow or tax their way out of this year’s version of the chronic deficit. But even if they do – and they appear to be very far apart – it would be merely a step, and not a particularly big one, on the budget road. They could put a budget up for floor votes, but they would still need to get some votes from Republicans, who have said anything that depends on higher taxes, or even extending some temporary taxes due to expire next year, is dead on arrival.

California budget idea: Ads on e-license plates

California’s legislature is exploring the feasibility of electronic license plates with digital ads, a move that its leading proponent says could add jobs and help in combating the state’s budget crisis.

Sen. Curren Price, a Democrat from the Los Angeles area, said the technology will resemble traditional license plates, with plate numbers visible at all times. However, digital ads and public service announcements would flash on the plate’s screen when the vehicle is stopped for more than a few seconds.

The technology could provide an additional source of revenue for the cash-strapped state, according to Price, the bill’s author, as advertisers and technology companies contract with the Department of Motor Vehicles. He said the plates could also aid small businesses and add jobs to the ailing economy in the technology, sales and marketing, and service industries.

“State governments are facing unprecedented budget shortfalls, and are actively rethinking the use of existing state assets to create new ongoing revenue opportunities,” he said. “This is a unique opportunity for public-private partnership.”

However, Price said he doesn’t know how much revenue electronic license plates would generate, or how many jobs they would create. California’s budget deficit is an estimated $19.1 billion.

New York:

Cigarette Tax Increased to Keep State Running

New Yorkers who like to smoke will have to dig a little deeper to light up next month, after the Legislature passed a bill on Monday that will give the state the highest cigarette taxes in the country. The new law, part of an emergency budget measure to keep the government running, adds another $1.60 in state taxes to every cigarette pack sold starting on July 1, pushing the average price of a pack to about $9.20. The average price in New York City, which imposes its own cigarette taxes, will be even higher, nearly $11 a pack.

Those who prefer other tobacco products will also be forced to pay significantly more. The tax on smokeless tobacco will more than double, to $2 an ounce from 96 cents an ounce, starting on Aug. 1. And the wholesale tax on cigars, dips and other kinds of tobacco will rise to 75 percent from 46 percent .

And in what may be the legislation’s most controversial provisions, starting on Sept. 1, the state will begin collecting — or try to collect — taxes on cigarettes sold on Indian reservations to off-reservation visitors, an issue that led to violent protests during the early 1990s. One Indian chief has said that trying to collect taxes would be considered an act of war.

Massachusetts:

Hill eyes another savings draw to blunt cuts if no federal funds

BOSTON — Girding for the start next week of a new fiscal year amid growing uncertainty about nearly $700 million in federal aid, legislative budget writers tentatively plan to withdraw $100 million from the state’s atrophying main savings account while refraining from deeper reductions in aid to cities and towns.

Gov. Deval Patrick and legislative leaders met Monday and discussed Beacon Hill’s narrowing menu of options for coping with Washington’s reluctance to authorize Medicaid funds that the administration, House and Senate all banked on for fiscal 2011. House budget chief Charles Murphy said the budget intended for the floor this week would contain two sets of line items, one in case the funds do not arrive and one if they do.

State lawmakers acknowledged not having much insight into Congress’s plans for the money, part of a $24 billion package that has received backing at one time or another from both legislative branches and the White House. “Frankly, they’ve recessed until this week sometime, so nobody knows,” Murphy said.

“We haven’t given up on it,” Patrick told reporters Monday. “I don’t think we should give up on it, given the fact that both the U.S. House and the U.S. Senate have voted on it. But if we don’t have it in hand by the time of the fiscal year, then we should have a budget that doesn’t account for it.” The Senate accounted for $687 million in additional federal assistance, while both Patrick and the House used $79 million less. In filing a contingency budget last week, Patrick, who has taken heat from his gubernatorial rivals for his budgeting practices, proposed holding harmless state support for local aid and public schools.

Colorado:


More state budget cuts likely, officials forecast

Colorado is looking over the edge of a $1 billion budget abyss, with key services, from schools to health care for the needy, on the chopping block next year. In a clear sign that economic recovery is not keeping pace with demand for governments services, economic forecasters warned a General Assembly budget committee on Monday that the state fiscal picture has worsened in the past three months and could be darker still in a year.

Economic forecasts prepared by the Governor’s office and by advisers to the General Assembly backed away from optimism seen earlier this year. They outlined a $1 billion crisis for the budget year that begins July 1, 2011.State revenue fell from a March economic forecast by more than $120 million, largely because tax collectors are having a difficult time getting people and businesses to pay up. That cuts into the state’s savings account, leaving Gov. Bill Ritter to come up with as much as $75 million in immediate cuts from the state’s $7 billion general fund.

On Monday, Gov. Bill Ritter said he is scouring the budget to cover the shortfall, with a plan due by August. He covered bigger shortfalls last year by furloughing state workers, cutting programs and releasing some inmates from state prisons. Ritter said that in the past two years he’s done his best to preserve essential state services while closing budget gaps totaling $3.5 billion. “As you go forward it becomes increasingly difficult to find ways to do that,” he said.

Colorado Springs Democratic Sen. John Morse has been predicting deeper budget cuts for months.

“Colorado is recovering, but, as predicted, it will be a slow and long recovery,” he said Monday. “While more cuts are inevitable, we, as legislators, must do what we can to make those cuts as painless as possible.”

New Jersey:

Budget compromise reached in N.J.

New Jersey Gov. Chris Christie and lawmakers reached a compromise on a $29.38 billion state budget Monday, which is scheduled for final votes on Monday.

The budget will make funds available for approved, shovel-ready Urban Enterprise Zone projects and uses $74 million in additional cost-savings to restore funding for several programs, including $22 million for general assistance. The budget plan, which closes a $11 billion deficit, will leave a more than $300 million surplus, Christie said.

“This budget stays true to the principles I originally outlined, keeping spending within our means and restoring fiscal order without raising taxes,” Christie said.

The state’s budget is due by June 30, a deadline Senate President Stephen M. Sweeney, D-Gloucester/Cumberland/Salem, said would be met.

“The budget we will introduce is far from perfect and will still be a tough sell among Democratic lawmakers, but the governor should be commended for working with us to take the sting our of some of its most harmful cuts,” Sweeney said of the budget compromise reached with Christie. “Most importantly, this budget will be signed on time, and all the rumors of a shutdown will remain just that.”

Some thoughts:

It’s clear who is serious and who isn’t. New York raises cigarette prices to 11 bucks a pack, and expects higher revenues rather than increased smuggling and a more powerful mafia. Massachusetts spends its savings while hoping for a federal bailout. And let’s not even bother with California. At the other end of the spectrum are Colorado and New Jersey, where real cuts will bring budgets closer to real balance.
It’s also clear that sometime in the next year or two, the worst-run states will balk at laying off half their workers and will choose instead to default on their debt, presenting Washington with the same choice as with the banks in 2008: bailouts or contagion.

Even where states make real cuts in spending, the resulting economic contractions will be brutal.

Muni bonds, which are funded by sport stadiums and the like — or by state/city general revenues — are the next sector to blow up.