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         Updated August 5, 2008

              FACING DEFICITS, MANY STATES ARE IMPOSING
                CUTS THAT HURT VULNERABLE RESIDENTS
                     By Nicholas Johnson, Elizabeth Hudgins and Jeremy Koulish

Summary

   Continuing economic problems have created budget problems in many states, 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 include:

  ·   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,
      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;
      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; 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.

   When states cut spending, they lay off employees, cancel contracts with vendors, reduce payments
to businesses and nonprofits that provide services, and cut benefit payments to individuals. All of
these steps remove demand from the economy, which only worsens a downturn. Tax increases also
remove demand from the economy by reducing the amount of money people have to spend.1

   The federal government, which can -- and arguably should -- run deficits during troubled
economic times, can help states minimize damaging budget cuts by providing assistance to the
states, as it did in the recession in the early part of this decade. Federal assistance can lessen the
extent to which states take these harmful, "pro-cyclical" actions and prevent budget cuts in vital
services residents need. In recognition that the current downturn is hitting some areas harder than
others, federal aid could be targeted to help the states that are experiencing the greatest economic
problems.2


Downturn Creating Widespread Deficits

   When the economy weakens, state and local revenues decline but the need for public programs
increases, as residents lose jobs, income, and health insurance. Already, more than half the states are
projecting deficits for the upcoming fiscal year or beyond. In the 29 states (plus the District of
Columbia) for which specific estimates are available, the combined deficits are expected to total at
least $48 billion for fiscal 2009. (In most states, fiscal year 2009 started July 1, 2008.) These deficits
average 9.3 to 9.7 percent of these states' general fund budgets.3

  Virtually all states are required to balance their operating budgets each year or each biennium.
Unlike the federal government, states cannot maintain services during an economic downturn by
running a deficit. Thus, states have to close these deficits with a combination of actions: drawing
down reserves, raising taxes, or cutting expenditures.

   Some states have already begun drawing on their rainy day funds and reserves. But if the
economy remains weak or falls into recession, states' reserve funds will be depleted and many more
states will likely turn to harmful budget cuts to balance their budgets. In addition, several states have
already enacted tax increases, and a few other states, such as California and Mississippi, are
considering them.



1 Tax increases on higher-income households, however, are less damaging to the economy that either spending cuts or

tax increases on lower-income households. This is because some of the funds higher-income people would use to pay
the increased taxes would come from savings and thus would not represent a decline in their consumption. See
http://www.cbpp.org/1-8-08sfp.htm.
2   See Economic Data Can Be Used to Target State Fiscal Relief Effectively, http://www.cbpp.org/3-3-08sfp.htm.
3See 29 States Faced Total Budget Shortfall of At Least $48 billion in 2009, http://www.cbpp.org/1-15-08sfp.htm. Excluding
California, deficits are 6.2 percent to 6.7 percent of budgets.




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Budget Cuts

   At least 21 states have enacted budget cuts that will affect services for children, the elderly, the
disabled, and families, as well as the quality of education and access to higher education. In a few
states, most notably California, some cuts have already been implemented and additional reductions
are being considered. 4

                                            Public Health Programs

   At least 13 states have implemented or proposed cuts that will affect eligibility for health
insurance programs and/or access to health care services.

    ·   Rhode Island has reduced the maximum income level at which parents can receive public
        health insurance from 185 percent of the federal poverty line to 175 percent. This will eliminate
        coverage for approximately 1,000 parents. More than 7,800 low-income families will also have
        to pay higher monthly premiums for public health insurance.

    ·   Nevada's governor has capped the state's SCHIP program at its approximate current number
        of enrollees and increased the premiums that families must pay. As a result, many applicants
        will be denied coverage, even though the economy is weakening and need consequently is
        rising. Health services for some pregnant women have also been eliminated.

    ·   Arizona is reducing its Medicaid rolls by increasing the frequency with which some adult
        recipients must reapply for benefits. (Research has shown such added paperwork requirements
        have the effect of causing eligible people to become uninsured.) Arizona has also cut funding for
        community health centers and vaccines.

    ·   Maine approved a budget that requires an annual $25 Medicaid enrollment fee for some low-
        income parents. Enrollment fees can deter individuals from seeking needed health insurance.

    ·   In Tennessee, an estimated 30,000 to 40,000 seriously ill people are expected to lose
        hospitalization and other needed medical services provided through TennCare.

    ·   In New Jersey, funds for charity care in hospitals have been cut, potentially affecting hospitals'
        ability to care for some of the state's neediest residents.

    ·   California's governor has proposed cuts in the state's SCHIP program, including increases in
        co-payments and reductions in dental services. He has also proposed eliminating dental and
        other services for adults in Medicaid and requiring more frequent eligibility determinations.
        Most recently, the governor has proposed rolling back eligibility for low-income, working
        parents from 107 percent of the poverty line to 61 percent of the poverty line. This would
        reduce the number of working parents who could qualify for health insurance by 400,000.
        California has already delayed paying providers and has cut by 10 percent reimbursements to
        many Medicaid providers.
4The 21 states are Alabama, Arizona, California, Connecticut, Delaware, Florida, Illinois, Kentucky, Maine, Minnesota,
Mississippi, New Hampshire, Nevada, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina,
Tennessee, and Virginia.



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    ·   In Mississippi, the Medicaid program is facing a $90 million shortfall, once special funds are
        taken into account. Policymakers have not yet determined how to address the shortfall.

    ·   In response to flat funding and rising costs, the health care agency in Illinois is lengthening the
        amount of time that it takes to pay health care providers such as doctors and hospitals for
        Medicaid services. This is likely to reduce access to health care for low-income families.

    ·   Other states that have enacted cuts in Medicaid or SCHIP include Florida, Minnesota, New
        Hampshire, and Virginia. Cuts include reduced or frozen reimbursements to health care
        providers.

                                 Programs for the Elderly and Disabled

  At least seven states have cut medical, rehabilitative, home care, or other services needed by low-
income people who are elderly or have disabilities, or significantly increased the amounts that such
people must pay for the services.

    ·   In Rhode Island, low-income elderly people now must pay higher rates for subsidized adult
        daycare. This is estimated to affect more than 1,200 people with incomes below $20,000.

    ·   In Florida, nursing homes and other providers will not get scheduled cost-of-living
        adjustments in their reimbursements and staffing standards will be relaxed for one year in the
        expectation that the freeze would result in staffing cuts. Medicaid reimbursements to hospitals
        and community-based services for the elderly, such as meals and homemaker services, have also
        been cut.

    ·   In Minnesota, policymakers capped enrollment at current levels for a program that provides
        expanded health services and care coordination for people with disabilities.

    ·   Ohio plans to close two mental health facilities.

    ·   In Alabama, the Department of Human Resources has announced it will end in August home-
        makers services for approximately 1,100 older adults. These services often allow people to stay
        in their own homes and avoid nursing home care.

    ·    California is delaying the cost-of-living adjustment for 1.3 million poor and near-poor elderly
        and disabled people who receive state supplementary payments to their Supplemental Security
        Income (SSI) benefits.

    · Tennessee has reduced community-based services for the mentally retarded.




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                                          K-12 Education

At least 11 states have implemented or proposed cuts to K-12 education.

·   Florida has cut aid to local school districts for the current year by $130 per pupil.

·   In Nevada, the governor has ordered various cuts to K-12 education, including delaying an all-
    day kindergarten expansion, cutting per pupil expenditures by $400 in a pilot program,
    eliminating funds for gifted and talented programs, eliminating funds for a magnet program for
    students who are deaf or hard of hearing, and making across-the-board cuts.

·   The governor in California has proposed cuts to K-12 education that translate to a reduction
    of $665 per student, including cuts in general operating spending, special education, K-3 class
    size reduction and other educational programs.

·   Rhode Island has frozen state aid for K-12 education at last year's levels in nominal terms and
    reduced the number of children who can be served by Head Start and similar services by more
    than 550.

·   State education funding has also been cut in Alabama, Delaware, Connecticut, Kentucky,
    Maine, Ohio, and Virginia.

                                     Colleges and Universities

At least 16 states have implemented or proposed cuts to public colleges and universities.

·   In Florida, university budgets and community-college funding have been cut. The University of
    Florida has announced it will eliminate 430 faculty and staff positions and decrease funding for
    disability services, financial aid services and internship opportunities. Student enrollment is
    declining by more than 1,000 students at both Florida State University and the University of
    Florida. The legislature has approved a statewide tuition increase of 6 percent; the University of
    Florida is increasing tutition for in-state under-graduates by 15 percent.

·   In Kentucky, state budget cuts to colleges and universities of about three percent have led to
    in-state tuition hikes of 5.2 percent at the Kentucky Community and Technical College System.
    The Council on Postsecondary Education has also approved in-state tuition increases for
    universities across the state from 6.1 percent (Murray State University) to 9 percent (University
    of Kentucky and University of Louisville). Additionally, the University of Kentucky has
    announced 188 faculty and staff positions will be eliminated.

·   Following cuts to state university budgets, tuition increases have been announced in Alabama
    (8.8 percent to 14 percent), Maine (10 percent), Oklahoma (9 percent to 10 percent), South
    Carolina (6 percent), Tennessee (6 percent) and Virginia (4.8 percent to 6.5 percent.). Rhode
    Island is increasing university tuition by 6 percent and community college tuition by 8.6
    percent.

·   Other states making cuts in higher education operating funding include Arizona, Connecticut,



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        Minnesota, Nevada, New Jersey, and New York. California has also proposed cuts to
        higher education. Large tuition increases are likely in some or most of these states.

                                          Cuts in Other Services

  States also are making or proposing cuts in a variety of other programs, including programs for
very poor families and other vulnerable populations.

    ·   Rhode Island has cut funds for affordable housing, eliminated health insurance for home-
        based child care providers, restricted TANF cash assistance for children, reduced health
        insurance for retired state workers and cut support to localities by $10 million.

    ·   California is considering eliminating its current minimal level of support for almost 200,000
        children whose parents have lost or are ineligible for cash assistance (TANF). Research shows
        that when families lose their entire cash assistance grant, they experience more hardships, such
        as not having enough to eat.

    ·   The Nevada welfare agency has proposed changes in how low-income families apply for and
        receive cash assistance and health insurance, with the expected result that fewer families will
        receive those benefits.

    ·   Illinois has reduced funding for child welfare, mental health, youth services, and other
        programs.

    ·   In Connecticut, the governor has ordered budget cuts to programs that help prevent child
        abuse and provide legal services for foster children


  Some states, such as Delaware, New Jersey, New York, Rhode Island, and Virginia, have
implemented cuts to localities, leading to local concerns about reductions in funding for policing,
meals for the elderly, hospice care, veteran services, senior services, and other services. In addition,
some states are instituting across-the-board spending cuts, the impact of which is uncertain.

                                         Cuts in State Workforce

   At least 15 states are eliminating or not filling various state jobs. Fewer staff often leads to
difficulties for residents in accessing state services. It also may contribute to increases in
unemployment in the state.

    ·   The Tennessee governor has announced the elimination of over 2,000 state positions ­ about
        5 percent of the state workforce. Early retirement will be encouraged through buy-outs.

    ·   In New York, the Governor in April asked state agencies to identify 3.35 percent reductions in
        spending. Many state agencies responded by leaving vacancies unfilled and other actions. In
        late July, the Governor ordered an immediate hiring freeze and further agency reductions of 7
        percent.




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  ·   In New Jersey, 2,000 state positions will be eliminated through encouraging early retirements,
      leaving vacancies unfilled and laying off staff.

  ·   Rhode Island seeks to reduce the state workforce by 2,000 or more employees. The state is
      encouraging early retirement but has announced that it will lay off workers if needed.

  ·   To deal with budget cuts in Kentucky, the Department of Public Advocacy (which defends
      clients in the criminal justice system) will cut about 10 percent of its workforce (54 positions).
      To keep caseloads at manageable levels, the department will decline some cases, including
      family court cases, probation and parole revocations and some types of involuntary
      commitments and misdemeanors.

  ·   The Ohio governor has announced plans to eliminate as many as 2,700 positions, about 4.5
      percent of the state workforce. The reductions will be achieved through a combination of early
      retirements, lay-offs, and unfilled vacancies. In the Department of Jobs and Family Services --
      which oversees a wide range of functions including disability services, child care, child support,
      health care, and child welfare -- fully 14 percent of positions are estimated to be eliminated or
      left unfilled.

  ·   In Vermont, vacant positions have been left unfilled and may be eliminated altogether. To date,
      the state workforce has been reduced by approximately 400 workers.

  ·   In California, hiring has been frozen. The Governor in late July issued an Executive Order
      that would result in up to 20,000 state employees being laid off and cut the pay of 200,000
      additional state workers to minimum wage, but it is unclear whether the pay cut will be
      implemented.

  ·   Hiring freezes have also been ordered in Arizona, Connecticut, Delaware, Minnesota, New
      Hampshire, and Virginia.

  In addition, as noted above, a number of state colleges and universities in states such as Florida,
Kentucky and New Jersey are responding to budget cuts by cutting faculty and staff positions.


Tax Increases

  States can avert deep cuts in vital services by enacting temporary or permanent revenue increases.
Several states already have enacted tax increases, closed loopholes, restricted tax credits, increased
tobacco taxes, raised tuition as noted above, or implemented other revenue raising measures.

  ·   Maryland enacted a $1.35 billion tax increase in late 2007, which (along with $277 million in
      budget cuts passed by the General Assembly) is designed to help address the state's deficit.

  ·   Michigan enacted a tax increase in late 2007 to close at least part of its budget gap, although it
      is expecting a further deficit for fiscal year 2009 (which begins in October 2008). The tax
      increase is expected to raise $1.365 billion in fiscal year 2008.




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    ·   The enacted New York budget raises approximately $1.5 billion in revenue through a variety of
        measures including closing tax loopholes, delaying tax credits, raising cigarette taxes, requiring
        collection of taxes for more on-line purchases, and increasing various fees.

    ·   New Jersey will eliminate property tax rebates for households with incomes over $150,000 and
        reduce property tax rebates for some other residents. Additionally, a public utilities tax that was
        scheduled to end in 2010 has been extended to 2013. A renters' credit for families with
        incomes under $50,000, previously worth $200 or more per family, has been cut to a maximum
        $80 per family for non-elderly, non-disabled renters.

    ·   In New Hampshire, large liquor retailers will pay more in state taxes (through a reduced
        purchasing discount, which amounts to an alcohol excise revenue increase). Additionally, the
        tobacco tax will increase after September 2008 if the existing tax does not bring in revenues of
        at least $50 million

    ·   Delaware increased various taxes relating to corporations, including increasing the annual tax on
        partnerships, limited partnerships, and limited liability companies, raising the gross receipts tax
        rate for certain businesses, and increasing the rate for computing the annual franchise tax.

    ·   Rhode Island eliminated a tax credit for foreign taxes paid, capped a tax credit for motion
        picture production, placed a moratorium on new projects qualifying for the historic structure
        tax credit, and increased some fees.

    ·   Massachusetts raised an additional $466 million by closing corporate loopholes and increasing
        the cigarette tax.

    ·   Alabama closed some corporate tax loopholes.

    ·   Several states, including Maine, Oklahoma, Rhode Island and Vermont, changed their tax
        codes to avoid revenue loss that would otherwise have occurred due to the federal economic
        stimulus legislation enacted earlier this year.

    ·   In California, the Legislative Analyst Office has issued options for raising state revenue,
        including changes in the personal income tax and limiting or eliminating some tax breaks for
        businesses. These changes would raise approximately $3 billion. Legislative leadership has
        expressed support for some tax increases. The Governor has proposed a ballot measure that
        would allow bonding against future lottery sales, or, if the ballot measure fails, an increase in the
        sales tax.


The Need for Federal Assistance

   When states cut spending, they lay off employees, cancel contracts with vendors, reduce payments
to businesses and nonprofits that provide services, and cut benefit payments to individuals. All of
these steps remove demand from the economy, which only worsens a downturn. Tax increases also
remove demand from the economy by reducing the amount of money people have to spend.




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   Federal assistance can lessen the extent to which states take these harmful, "pro-cyclical" actions
and the extent to which vulnerable populations are hurt by state budget cuts. In the recession early
in this decade, the federal government provided $20 billion in temporary fiscal relief: 1) a
temporary, $10 billion increase in the federal share of Medicaid costs; and 2) $10 billion in general
grants to states, based on their population. The increased Medicaid match averted even deeper cuts
in public health insurance than the substantial cuts that 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 long after the onset of the
recession, so it was much less effective than it could have been in preventing state actions that
deepened the economic downturn. To avoid that problem, the federal government should consider
aiding states earlier, rather than waiting until the downturn is over or nearly over.

   Another difference in this economic downturn is the uneven distribution of the economic and
fiscal problems. Some states are particularly hard hit, especially those in which employment is
stagnant or declining, housing foreclosure rates are climbing, and poverty is rising. Other states,
including those with energy resources and those benefiting from higher commodity prices, have
fewer or no problems. To account for the unevenness, federal aid could be targeted based on
economic factors to the states most in need of assistance.5




  5   See Economic Data Can Be Used to Target State Fiscal Relief Effectively, http://www.cbpp.org/3-3-08sfp.htm.



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