States of fiscal crisis

Nov. 12, 2009
“Record-setting revenue drops, high unemployment and far-flung fallout from the housing bust and credit crisis; virtually all states have been stressed by the downturn. We expect that when state lawmakers next spring turn to crafting their new budgets ...

Record-setting revenue drops, high unemployment and far-flung fallout from the housing bust and credit crisis; virtually all states have been stressed by the downturn. We expect that when state lawmakers next spring turn to crafting their new budgets for 2011, many will confront an even tougher set of challenges, as states already have made significant cuts, yet revenues continue to drop, and stimulus funds will be running out.” –Susan Urahn, managing director, the Pew Center on the States

It’s no secret that U.S. state budgets are under extreme stress in this ongoing global economic downturn. The big worry, though, is how many of them are teetering precariously on the edge of fiscal calamity – and how this situation could affect the critical role states play in maintaining our transportation infrastructure.

According to a new report by the Pew Center on the States – a division of The Pew Charitable Trusts – Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin join California (whose statehouse is at right) as the 10 most troubled states. In the report – Beyond California: States in Fiscal Peril – Pew’s research indicates state budget troubles can have significant repercussions, such as: higher taxes or fees; layoffs or furloughs of state workers; longer waits for public services; more crowded classrooms; higher college tuition and less support for the poor or unemployed.

They also pose challenges for the nation as a whole, Pew noted, as together these 10 states account for more than one-third of America's population and economic output. And actions taken by state governments to balance their budgets – such as tax increases, additional fees for services, and drastic spending cuts – can not only slow down the country's recovery, but put a big hole in the wallets of businesses and citizens alike.

“A challenging mix of economic, political and money-management factors have pushed California to the brink of insolvency. But while California often takes the spotlight, other states are facing hardships just as daunting,” explained Susan Urahn, managing director of the Pew Center on the States (seen below at left). “Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers.”

Pew's researchers identified six major factors that contribute to budget issues for these states: (1) loss of state revenues; (2) the relative size of budget gaps; (3) increasing joblessness; (4) high foreclosure rates; (5) legal obstacles to balanced budgets – specifically, a supermajority requirement for tax increases or budget bills and (6) poor money-management practices.

While the public policy group cautioned that its report is not a comprehensive diagnosis of state fiscal health – demographics, debt burden and public pension liabilities are also major issues – Pew’s research team said it’s an important tool to begin to understand why some states are suffering more acutely from this recession than others.

There are also several big “threads,” if you will, that cut across all 10 states in terms of their fiscal woes; threads that could point to vulnerabilities in others as they try to navigate their way out of the fiscal crisis:

Unbalanced economies. A number of states on the list, including Florida, Michigan, Nevada and Oregon, have struggled in part because their economies have depended so heavily on a particular industry. This reliance on a single sector may have paid off in times past, but it put these states at greater risk when the recession hit. States cannot choose their natural resources, of course, but they can budget and manage for additional volatility that can result from dependence on a particular sector by seeking to diversify their economies.

Revenues and expenditures out of alignment. The severity of the recession has resulted in states across the country facing substantial gaps between what they collect in revenue and what they spend (Gee, does this problem sound familiar to anyone?). Yet of the 10 states in Pew’s study, including California, Illinois, Michigan, New Jersey, Rhode Island and Wisconsin, have a history of persistent shortfalls. “Aligning revenues and expenditures is a key component of fiscal health,” noted Urahn. (Now, if only the President and Congress could understand this …)

Limited ability to act. In most of the 10 states Pew surveyed, including Arizona, California, Florida, Nevada and Oregon, lawmakers' latitude to respond to the fiscal crisis by raising taxes or cutting spending is limited by their states' constitutions, ballot measures passed by voters, or other statutory or legal impediments to change.

Putting off tough decisions. (Now here is THE single biggest, thorniest philosophical issue in government today across the globe!!) Several states on the list were unable to muster the political resolve to enact long-term fixes to their fiscal problems. Virtually every state had to make tough decisions this year about where to cut and how to raise additional revenues, including through taxes or fees. But in some states, including California, Illinois and New Jersey, lawmakers punted the responsibility – either by asking their voters or governors to make the call, or by borrowing or using accounting methods to put off the hard choices until later.

To make matters worse, Pew projects the states' fiscal situations are widely expected to get worse even if the national economy starts to recover. At the end of 2010, federal stimulus money that helped states meet some of their expenses begins to run out. Plus, states historically have their worst years shortly after a national recession ends, when they are coping with higher Medicaid and other safety-net expenses and when revenues lag because of stubborn unemployment, the group said.

When you take all this in and process it from a trucking perspective, you can’t help but ask a single question: what happens to the roads and bridges? If you’re a politician, weighing a reduction in road and bridge maintenance funds against steep cuts to, say, medical care for the elderly or poor, which way might you lean? I can tell you this – roads and bridges don’t go on cable TV news stations to complain about a lack of funding, I tell you.

In my neck of the woods, state governments make bets on Mother Nature being most forgiving and kind to fill in budget gaps – often times raiding funds set aside for snow removal operations in particular. That can backfire awful fast, as no one can predict what Mother Nature may decide to do from week to week in wintertime, or day to day for that matter.

On another level, we’re already seeing a range of fee hikes and the closure of public rests stops along the highways as a result of state fiscal troubles NOW. Yet if things are supposed to get fiscally WORSE in the months ahead, what other cuts might be waiting in the wings?

So as states are forced to deal with an ever rising tide of red ink, those that ply the highways for a living ought to be getting concerned – about things such as higher toll charges, for example. Nothing will be off the table if state fiscal ledgers don’t improve; you can bet your bottom dollar on that … if you have one left, that is.

About the Author

Sean Kilcarr 1 | Senior Editor

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