Hard times: States facing budget deficits
June 1, 2008 4 minutes read
Hard times: States facing budget deficits
Even as there is buzz about some states working to expand health coverage in response to healthy economies, a number of economists are looking ahead and seeing fiscal trouble on the horizon. According to the Center on Budget and Policy Priorities (CBPP), at least 21 states, including several of the nation's largest, face budget shortfalls for the 2009 fiscal year. And another five states expect budget problems in FY 2010, although some of those gaps could occur earlier than expected.
CBPP traces the coming problems to the bursting of the housing bubble, which has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, etc.; weakening consumption of other consumer products; reduced property tax revenues; and the potential for weakening income tax revenues if the employment situation continues to deteriorate.
Because most state constitutions prohibit them from running a deficit or borrowing to cover operating expenditures, unlike the federal government, there are three primary actions available to states to deal with a fiscal crisis: draw down available reserves, cut expenditures, or raise taxes. CBPP says states already have begun drawing down reserves and those that remain are not sufficient to allow them to weather a significant downturn or recession. And cutting spending or increasing taxes can further slow a state's economy during a downturn and also contribute to further slowing of the national economy.
The 14 states in which revenues are expected to fall short of the amount needed to support current services in FY 2009 are Arizona, California, Florida, Iowa, Kentucky, Maryland, Maine, Massachusetts, Minnesota, Nevada, New Jersey, New York, Rhode Island, and Virginia. The budget gaps range from $57 million (Maine) to $14.5 billion (California) and total $28.9 billion to $30.9 billion, representing 8.5% to 9.1% of the affected states' FY 2008 general funds.
Another seven states that have said they will have FY 2009 deficits but have not released specific information are Alabama, Illinois, Michigan, Mississippi, Oklahoma, South Carolina, and Vermont. And analysts in Connecticut, Missouri, Ohio, Texas, and Wisconsin are projecting budget gaps in FY 2010 and beyond.
Residents and economies affected
"In states facing budget gaps, the consequences could be severe for residents as well as the economy," CBPP's Elizabeth McNichol and Iris Lav say. "Even if the economy does not fall into a recession, as it did in the earlier part of this decade, actions will have to be taken to close the budget gaps states are now identifying. The experience of the last recession is instructive as to what kinds of actions states may take."
In the last recession, they say, some 34 states cut eligibility for public health programs, costing more than 1 million people their health coverage. They also made cuts in child care programs and per-pupil aid for elementary and secondary education. States that raised taxes generally pick the more regressive taxes that fall most heavily on lower-income residents. The analysts say if property tax revenues decline because of drops in housing, localities and schools will either have to get more state aid or reduce expenditures on schools, public safety, and other services.
Federal assistance can lessen the extent to which states take procyclical actions such as expenditure cuts and tax increases that can further harm the economy, the report says. In the recession in the early part of this decade, the federal government provided $20 billion in a 2003 fiscal relief package, with $10 billion going to a temporary increase in the federal share of Medicaid and $10 billion to general grants to states based on population.
The higher Medicaid federal match averted even deeper cuts in public health insurance, it says, while the general grants helped prevent cuts in many other critical services. The problem with this assistance was that it was enacted many months after the recession began, so it was less effective than it could have been in preventing state actions that deepened the economic downturn. "The federal government should consider aiding states earlier," Ms. McNichol and Ms. Lav say, "rather than waiting until the downturn is nearly over."
Medicaid match increase
Congressional Democrats indicated they want a temporary increase in federal Medicaid payments to be part of an economic stimulus package. Washington observers said the plan could face Republican resistance unless Republicans get some other things they want.
National Association of State Medicaid Directors chairman David Parrella, who heads Connecticut's Medicaid program, said a higher federal match would help states maintain Medicaid eligibility levels at a time when more people are likely to become uninsured because of job loss and apply for Medicaid benefits.
Observers said the increase would be worth several billion dollars and would provide an immediate boost to states, even though funds could only be used for Medicaid. In the last recession, states received a 1.5% increase in federal matching funds for six fiscal quarters.
HHS secretary Mike Leavitt said he was opposed to the increased federal match because it could mean increased federal control over health care. "I don't think that Medicare and Medicaid were intended as jobs programs," he said. "They were intended to help those with serious economic disadvantages."
A House Republican aide told Congressional Quarterly increasing Medicaid payments "is a great way to expand entitlement spending but would do little or nothing to actually improve the economy for working Americans. It is just a simple cash transfer to states, with no connection to the areas of greatest need or any requirement that the money actually be spent in ways that help improve the economy."
Download the CBPP analysis at www.cbpp.org/1-15-08sfp.htm.
Even as there is buzz about some states working to expand health coverage in response to healthy economies, a number of economists are looking ahead and seeing fiscal trouble on the horizon.You have reached your article limit for the month. Subscribe now to access this article plus other member-only content.
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