Depressed Economy Wallops States

Special to the Pew Research Center
Depressed Economy Wallops States
by Pamela M. Prah, Stateline.org Staff Writer
October 24, 2008

Note: Stateline.org, a nonpartisan, nonprofit news source, was a project of the Pew Research Center from 2004 to 2008. As of July 1, 2008, it is a project of the Pew Center on the States. Findings from this guest article should be attributed to Stateline.org.

Staggered by turbulent financial markets and anxious about a rapidly slumping economy, many state governments are slashing their budgets, frantically trying to stay afloat.

After two years free of major fiscal worries, state policymakers in 2008 were hit by a triple-whammy: a Wall Street meltdown that made it more difficult and costly to borrow; a record number of home foreclosures that took a big bite out of tax revenues; and soaring oil and gas prices that squeezed budgets of all but the energy-producing states.

With calendar 2008 nearing an end, Stateline.org's annual state-by-state review of major accomplishments finds lawmakers girding for big spending cuts in 2009 and beyond. California and Massachusetts were so worried about paying their monthly bills in October they considered asking the federal government for loans.

The year began with governors unveiling bold proposals that went nowhere as the housing market tanked and the economy deteriorated. Most notable, perhaps, was Republican California Gov. Arnold Schwarzenegger's sweeping health-care reform plan -- an early casualty of California's budget troubles. Proposals to expand health care insurance in Illinois, Missouri, New Mexico and Pennsylvania also fell by the wayside because of the faltering economy.

In New York, which stands to lose $1 billion in tax revenue on the Wall Street meltdown alone, lawmakers will consider in a Nov. 18 special session whether to pare back a far-reaching plan enacted earlier this year to use state money to cover nearly 400,000 additional children through the state's Children's Health Insurance Program. The state pushed the idea after the Bush administration last year said they were ineligible because these children's families earned too much.

On the education front, Arizona Democratic Gov. Janet Napolitano's plan to give free tuition to every Arizona child who graduates from high school with a B average also fell victim to a shortage of funds. Pre-kindergarten programs took a hit in Tennessee and Virginia, paid family leave was victimized in Washington and a popular voter-approved plan to shrink the number of students per classroom is getting renewed scrutiny in Florida because of the costs.

The budget crisis is coinciding with a historic election year for the White House that features candidates with experience from the ranks of state government. Democratic presidential candidate Barack Obama served in the Illinois legislature while Republican candidate John McCain has Alaska Gov. Sarah Palin as his running mate.

The millions of new, first-time voters who registered so that they could cast ballots for president could also make a crucial difference in governors' races in Indiana, Missouri, North Carolina and Washington. And political control of at least 10 legislative chambers could easily turn over.

With a new occupant of the White House, states hope to fare better on a host of issues that President Bush or Congress has blocked, including immigration enforcement, new, more secure driver's licenses, global warming, children's health insurance and the No Child Left Behind education law. But the next president will be hard-pressed to find the money for what the states want while paying for wars in Iraq and Afghanistan and the $700 billion Wall Street bailout.

States patch deficits with tax hikes, four-day work weeks

The housing slump that started in 2007 started crimping state budgets in 2008. As people bought fewer homes, states got less real-estate and sales tax revenue. Sales taxes shrank because most people who buy homes also purchase appliances, carpeting and other big-ticket items. The vacation and retirement destination states of Arizona, California, Nevada and Florida were hit particularly hard.

Many states were forced to dip into rainy-day funds, freeze hiring and delay projects to plug deficits of more than $40 billion in fiscal 2009 budgets that for all but four states began July 1. The shortfall was triple the $13 billion they weathered a year earlier.

The cuts had widespread impact. California laid off 10,000 part-time and temporary state workers. Ohio shut down two mental health facilities. Rhode Island dismantled a two-year-old program that provided discounted electricity and heating oil to the poor. New Jersey rescinded property tax breaks and unsuccessfully attempted to charge small municipalities for state police patrols. Maine charged adults enrolling in Medicaid a $25 fee. And in Georgia, some library branches were set to close and some fire departments postponed plans to buy new fire trucks after the state cut local funding.

And cuts weren't always enough. Tax increases, always a last resort for lawmakers, were levied in a handful of states and more could be coming since states are required to balance their budgets.

Minnesota legislators overrode Gov. Tim Pawlenty's (R) veto to hike the state's gasoline tax by 8.5 cents a gallon to raise road and bridge funds in the wake of last year's deadly Minneapolis bridge collapse. Nebraska lawmakers overrode Gov. Dave Heineman's (R) veto and raised the state's gasoline tax by 1.2 cents. And Arkansas lawmakers voted in a special session to increase its natural-gas severance tax, the first such tax hike since 1957, to 5 percent of the market value of the gas.

Maryland adopted a new tax on millionaires, and Illinois raised the sales tax in the Chicago area to keep public transit agencies in the black. New Hampshire, New York and Massachusetts all upped their taxes on cigarettes.

Maine voters Nov. 4 will get to decide whether to keep or overturn the legislature's recently-enacted law that doubles the excise raise on beer and wine, with the money directed to the state's health insurance program, called Dirigo.

Looking for new revenue sources, New York became the first to require online retailers like Amazon that do not have a physical presence in the state to collect sales taxes from state residents. Amazon.com is challenging the law in court.

States also economized in other ways. Utah Gov. Jon Huntsman Jr. (R) ordered a four-day work week for 17,000 of the state's 23,000 employees. Florida, Indiana, Kentucky, New York, South Carolina and Washington also switched some employees to shorter work weeks. Connecticut closed state buildings at night and on weekends to save energy costs. Vermont ended its legislative session two weeks early, saving the state $1 million.

Nevada's budget woes were so bad that the state cut funding for school textbooks and roads, capped enrollment in children's health care and cut back on bodyguard protection for the state's first lady.

But other ideas to generate much-needed cash went down in flames. The governors of New Jersey and Pennsylvania both pushed the idea of privatizing state assets or adding tolls to state roads, but these efforts collapsed after voters objected. The governors of Kentucky and Massachusetts both wanted to bring casino gambling to their states, but their legislatures balked.

Mother Nature added to state budget havoc. This summer's floods in the Midwest hit Iowa hard, but also affected Illinois, Indiana, Iowa, Minnesota and Missouri. And the aftermath of Hurricane Ike could dent Texas's projected $10.7 billion budget surplus over the next two years. Priced out of private insurance, most coastal homeowners turned to cheaper, state-backed insurance. The Texas Windstorm Insurance Association was deluged with claims that could cost as much as $2 billion -- a big bill even in a mineral-rich state that is better off financially than most states.

Before the hurricane, Texas was among a dozen states spared economic pain. States that produce oil, gas or grain benefited from high energy and commodity prices. North Dakota, for example, had a $740 million surplus largely because of oil and agriculture production. But even states with comfortable cushions are concerned about the economy. Some Montana lawmakers said they don't expect to have its current $1 billion state budget surplus when they convene for the 2009 session in January.

The credit crunch made it harder for states to borrow while the stock market dive wiped out billions in state investments. Another round of deep cuts is currently under way in California, Connecticut, New York, Massachusetts, Maryland, Pennsylvania and Virginia, among others.

Cash-strapped California still makes history

The fiscal crunch didn't stop states from making legislative history. Always a trail-blazer, California became the first in the nation to encourage housing construction near workplaces and public transportation to curb suburban sprawl and reduce air pollution. The measure is seen as a step to meet an historic 2006 state law that promises to reduce greenhouse gas emissions by 25 percent by 2020.

In other precedent-setting actions:

California became the first state to prohibit restaurants from using artificial trans fats and will require fast-food restaurants to post the calorie and nutritional content of menu items. The aim is to reduce obesity.

New Jersey became the first state to require parents to get health insurance for their kids, but there's no punishment for those who don't.

Colorado embarked on a "preschool-to-college" educational system designed to give students the skills needed for college.

Sun-splashed Hawaii became the first state to require all homes be built with solar water heaters.

Massachusetts agreed to a first-in-the-nation plan to manage development of its waters as a wind, wave and tidal energy resource. The Bay State became second, after California, to require development of a low-carbon fuel standard for vehicles that would reduce greenhouse gases by 10 percent. And it became the first to exempt non-food-based biofuels from state gas taxes. Its goal is to provide an incentive for developing alternatives to ethanol. A growing concern with corn-based ethanol is that it raises food prices and that processing and transportation cause more environmental harm than gasoline.

And for the first time, 10 Northeastern states in September held the nation's first auction of pollution credits aimed at curbing global warming.

While a push toward universal health care failed in several states, modest gains were made elsewhere, although it remains to be seen whether they will survive legislative cost-cutting in 2009.

Read the full report at stateline.org.

Also find state-by-state session summaries of the 48 legislatures that met this year (Montana and North Dakota did not meet) at stateline.org.