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Created: Tue Aug 5 10:33:42 2008
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820 First Street NE, Suite 510
Washington, DC 20002
Tel: 202-408-1080
Fax: 202-408-1056
center@cbpp.org
www.cbpp.org
Updated August 5, 2008
29 STATES FACED TOTAL BUDGET SHORTFALL
OF AT LEAST $48 BILLION IN 2009
By Elizabeth C. McNichol and Iris J. Lav
At least 29 states plus the District of Columbia, including several of the nation's largest states,
faced an estimated $48 billion in combined shortfalls in their budgets for fiscal year 2009 (which
began July 1, 2008 in most states.) At least three other states expect budget problems in fiscal year
2010.
In general, states closed these budget gaps through some combination
of spending cuts, use of reserves or revenue increases when they adopted a fiscal year 2009 budget.
At this point in the year, most states have already adopted
those budgets; only two states -- California and Michigan -- FINAL ESTIMATE OF GAPS IN
1
continue to deliberate. In order to present a complete PROJECTED FY2009 BUDGETS
picture of the impact of the current economic downturn on
· 29 states faced budget gaps
state finances, we report both the gaps that have been closed totaling $48 billion in their
and those that will be closed in the future. FY2009 budgets, as of early July.
The bursting of the housing bubble has reduced state sales · This report is the last update of a
tax revenue collections from sales of furniture, appliances, series of reports on shortfalls that
states have faced in their FY2009
construction materials, and the like. Weakening budgets. All but two states --
consumption of other products has also cut into sales tax California and Michigan -- have
revenues. Property tax revenues have also been affected, adopted budgets for FY2009.
and local governments will be looking to states to help
address the squeeze on local and education budgets. And if · Because economic conditions
remain unsettled, it is likely that
the employment situation continues to deteriorate, income mid-year budget gaps will develop
tax revenues will weaken and there will be further downward in these adopted budgets. These
pressure on sales tax revenues as consumers become shortfalls will be tracked in a
reluctant or unable to spend. separate report.
The vast majority of states cannot run a deficit or borrow to cover their operating expenditures.
As a result, states have three primary actions they can take during a fiscal crisis: they can draw down
available reserves, they can cut expenditures, or they can raise taxes. States already have begun
1 California has partially addressed its shortfall.
1
TABLE 1: SIZE OF FY2009 BUDGET GAPS
Percent of FY2008 General
Amount
Fund
Alabama $784 million 9.2%
Arizona $1.9 billion 17.8%
Arkansas $107 million 2.5%
California1 2 $22.2 billion 21.3%
Connecticut $150 million 0.9%
Delaware $217 million 6.4%
District of Columbia $96 million 1.5%
Florida $3.4 billion 11.0%
Georgia $245 million 1.2%
Illinois $1.8 billion 6.6%
Iowa $350 million 6.0%
Kentucky $266 million 2.9%
Maine $124 million 4.0%
Maryland $808 million 5.5%
Massachusetts $1.2 billion 4.2%
Michigan1 $472 million 4.9%
Minnesota $935 million 5.5%
Mississippi $90 million 1.8%
Nevada $898 million 13.5%
New Hampshire $200 million 6.4%
New Jersey $2.5 - $3.5 billion 7.6 - 10.6%
New York $4.9 billion 9.1%
Ohio $733 million - $1.3 billion 2.7 - 4.7%
Oklahoma $114 million 1.6%
Rhode Island $430 million 12.6%
South Carolina $250 million 3.7%
Tennessee $468 million - $585 million 4.2 - 5.2%
Vermont $59 million 5.1%
Virginia $1.2 billion 6.9%
Wisconsin $652 million 4.8%
TOTAL $47.6 - $49.2 billion 9.3 - 9.7%
1
These states have not yet adopted budgets for FY2009.
2
In a special session earlier this year, California adopted measures to close $7.0 billion of this shortfall.
A gap of $15.2 billion remains to be closed. Assumes that FY08 gap would have carried over to FY09.
drawing down reserves; the remaining reserves are not sufficient to allow states to weather a
significant downturn or recession. The other alternatives -- spending cuts and tax increases -- can
further slow a state's economy during a downturn and contribute to the further slowing of the
national economy, as well.
The Center on Budget and Policy Priorities currently is monitoring state fiscal reports and is in
touch with state officials and/or relevant state nonprofit organizations in the 50 states and DC.
The fiscal situation appears to be as follows.
· Over half of the states have faced problems with their FY2009 budgets.
· The 29 states in which revenues were expected to fall short of the amount needed to support
2
current services in fiscal year 2009 are Alabama, Arkansas, Arizona, California,
Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kentucky, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Hampshire, New
Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee,
Vermont, Virginia, and Wisconsin. In addition, the District of Columbia closed a shortfall
in fiscal year 2009. The budget gaps totaled $47.6 to $49.2 billion, averaging 9.3 percent to 9.7
percent of these states' general fund budgets. (See Table 1.) California -- the nation's largest
state -- faced the largest budget gap. The shortfalls that states other than California faced
averaged 6.2 percent to 6.7 percent of these states' general fund budgets.
· Analysts in three other states -- Missouri, Texas, and Washington -- are projecting budget
gaps a little further down the road, in FY2010 and beyond. 2
This brings the total number of states identified as facing budget gaps to 32 -- close to two-thirds
of all states. Most states have addressed the FY2009 budget gaps identified here. However, new
budget gaps in these and other states are likely to develop as state revenue forecasts are updated
during the year.
There are a number of reasons why some states have not been affected by the economic
downturn. Some mineral-rich states -- such as New Mexico, Alaska, and Montana -- are seeing
revenue growth as a result of high oil prices. Other states' economies have so far been less affected
by the national economic problems. This does not mean, however, that local governments in those
states will escape fiscal stress. Some states with mineral revenues or with industries less affected by
the national downturn have been affected by the housing bubble and could face widespread local
government deficits.
In states facing budget gaps, the consequences could be severe -- for residents as well as the
economy. Unlike the federal government, states cannot run deficits when the economy turns down;
they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets.
As a new fiscal year begins in most states, budget difficulties are leading some 21 states to reduce
services to their residents, including some of their most vulnerable families and individuals.
Examples of enacted and proposed cuts to state services include3:
· Public health programs: At least 13 states have implemented or are considering cuts that will
affect low-income children's or families' eligibility for health insurance or reduce their access to
health care services. For example, Rhode Island has eliminated health coverage for 1,000 low-
income parents, and New Jersey has cut funds for charity care in hospitals. California's
governor has proposed requiring many low-income families to pay more for their children's
health care.
· Programs for the elderly and disabled: At least seven states are cutting medical,
2 Analyses prepared by the legislature or by nonprofit fiscal organizations in these seven states found that expected
revenues will fall short of the amount needed to support current services. The appendix to this paper shows the sources
of these analyses.
3 For more detailed information see Facing Deficits, Many States are Imposing Cuts that Hurt Vulnerable Residents
http://www.cbpp.org/3-13-08sfp.htm.
3
rehabilitative, home care, or other services needed by low-income people who are elderly or
have disabilities, or significantly increasing the cost of these services. For example, Florida has
frozen reimbursements to nursing homes and relaxed staffing standards and Rhode Island is
requiring low-income elderly people to pay more for adult daycare.
· K-12 education: At least 11 states are cutting or proposing to cut K-12 and early education;
several of them are also reducing access to child care and early education. For example:
Florida cut school aid by an estimated $130 per pupil, Nevada eliminated funds for gifted and
talented programs, and Rhode Island is eliminating early education funding for 550 children.
California is also proposing substantial K-12 cuts.
· Colleges and universities: At least 16 states have implemented or proposed cuts to public
colleges and universities. For example, Alabama, Kentucky, and Virginia have all cut
university budgets and/or community-college funding, resulting in tuition increases of 5 percent
to 14 percent.
· State workforce: At least 15 states have proposed or implemented reductions to their state
workforce. Workforce reductions often result in reduced access to services residents need.
They also add to states' woes by contracting the state economy. New Jersey is reducing its
workforce by 2,000 employees through early retirement, lay-offs and attrition, leading an
independent monitor to express concern about the impact on abused or neglected children
losing experienced caseworkers; in Kentucky, the public defender will eliminate 10 percent of
positions and decline certain types of cases; hiring freezes have been instituted in Arizona,
California, Connecticut, Delaware, Minnesota, New Hampshire and Virginia.
If revenue declines persist as expected in many states, additional budget cuts are likely. The
experience of the last recession is instructive as to what kinds of actions states may take as is likely.
Between 2002 and 2004 states reduced services significantly. For example, in the last recession,
some 34 states cut eligibility for public health programs, causing well over 1 million people to lose
health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited
access to child care. In addition, 34 states cut real per-pupil aid to school districts for K-12
education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school
days, fewer personnel, and reduced transportation.
Expenditure cuts and tax increases are problematic policies during an economic downturn
because they reduce overall demand and can make the downturn deeper. When states cut spending,
they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses
and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In
all of these circumstances, the companies and organizations that would have received government
payments have less money to spend on salaries and supplies, and individuals who would have
received salaries or benefits have less money for consumption. This directly removes demand from
the economy. Tax increases also remove demand from the economy by reducing the amount of
money people have to spend.
The federal government -- which can run deficits -- can provide assistance to states and
localities to avert these "pro-cyclical" actions.
4
FIGURE 1
State General Fund Spending as
Percent of GDP
5.1%
5.0%
4.9%
4.8%
4.7%
4.6%
4.5%
4.4%
4.3%
op d
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
es Y07
ed
te
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
FY
os
09 ima
F
t
pr
08
FY
FY
Source: NASBO, BEA, and CBO data.
revised july 2008
States Have Restrained Spending and Accumulated Rainy Day Funds
Many states have never fully recovered from the fiscal crisis in the early part of the decade. This
fact heightens the potential impact on public services of the deficits states are now projecting.
State expenditures fell sharply relative to the economy during the 2001 recession, and for all states
combined they remain below the FY2001 level. (See Figure 1.) In 18 states, general fund spending
for FY2008 -- six years into the economic recovery -- remained below pre-recession levels as a
share of the gross domestic product.
In a number of states the reductions made during the downturn in education, higher education,
health coverage, and child care remain in effect. These important public services were suffering
even as states turned to budget cuts to close the new budget gaps. Projected spending as a share of
the economy declined in FY2008 and is projected to decline further in FY2009.
One way states can avoid making deep reductions in services during a recession is to build up
rainy day funds and other reserves. At the end of FY2006, state reserves -- general fund balances
and rainy day funds -- totaled 11.5 percent of annual state spending. These reserves were estimated
to decline to 7.5 percent of annual spending by the end of fiscal year 2009. Reserves can be
particularly important to help states adjust in the early months of a fiscal crisis, but generally are not
sufficient to avert the need for substantial budget cuts or tax increases.
5
Federal Assistance is Needed
Federal assistance can lessen the extent to which states take pro-cyclical actions that can further
harm the economy. In the recession in the early part of this decade, the federal government
provided $20 billion in fiscal relief in a package enacted in 2003. There were two types of assistance
to states: 1) a temporary increase in the federal share of the Medicaid program; and 2) general grants
to states, based on population. Each part was for $10 billion. The increased Medicaid match
averted even deeper cuts in public health insurance than actually occurred, while the general grants
helped prevent cuts in a wide variety of other critical services. The major problem with that
assistance was that it was enacted many months after the beginning of the recession, 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, rather than waiting until the downturn
is nearly over.
6
APPENDIX
State Source Notes
Alabama Legislative Fiscal Office
Arizona Governor's proposed budget
Arkansas Department of Finance and Administration
California Legislative Analyst Office analysis of Assumes FY2008 gap carried over to FY2009.
Governor's May revised budget California has adopted measures to close $7 billion
of this shortfall.
Connecticut Office of Fiscal Analysis
Delaware Delaware Economic and Financial
Advisory Council Revenue Forecast
Florida Florida Revenue Estimating Conference
Georgia Georgia Budget and Policy Institute
Illinois Calculated by Voices for Illinois Children
based on the Governor's proposed budget
Iowa Summary of FY 2009 Budget, Legislative This is the gap between projected revenues and
Services Agency and Revenue Estimating spending before accounting for the expenditure
Conference limitation.
Kentucky State Budget Director Revenues falling short of projections.
Maine Maine Revenue Forecasting Committee FY2009 is the second year of the biennial budget.
Maryland Maryland Budget and Tax Policy Center Gap reflects $500 million in spending cuts assumed
and Maryland Board of Revenue Estimates in special session bill plus the effect of lower
revenue estimates. Adopted budget closed gap.
Massachusetts Executive Office of Administration and
Finance
Michigan May 2008 Consensus Revenue Forecast
Minnesota Minnesota Department of Finance
Mississippi Mississippi Economic Policy Center
Missouri Missouri Budget Project
Nevada Governor's office FY2009 is the second year of the biennial budget.
Governor has taken actions to close gap, some of
which are being contested.
New Hampshire Press reports
New Jersey Governor's proposed budget
New York Division of Budget
Oklahoma Oklahoma State Board of Equalization
Ohio Ohio Office of Budget and Management
Rhode Island Office of the Senate Fiscal Advisor of the
Rhode Island Senate
South Carolina Revenue Forecasting Council, budget
hearing
Tennessee Governor's office
Texas Center for Public Policy Priorities
Vermont Public Assets Institute
Virginia Commonwealth Institute Executive actions plus adopted budget closed gap.
Washington Washington State Budget & Policy Center
Wisconsin Legislative Fiscal Bureau
7