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Lou Cannon: Falling Forecasts Hit Close to Home

The great expectations of America’s states are replaced by cries for help. Is anyone really listening?

By Lou Cannon, State Net Capitol Journal |

California is facing dark days ahead, with a $41.8 billion budget gap anticipated by July 2010 — nearly half the $86 billion in revenue the state expects to collect during the coming fiscal year.
California is facing dark days ahead, with a $41.8 billion budget gap anticipated by July 2010 — nearly half the $86 billion in revenue the state expects to collect during the coming fiscal year. (iStock photo)

A year ago, during the dying days of the global economic boom, state officeholders throughout the land glowed in the anticipation of continued prosperity. When the National Conference of State Legislatures reported on the fiscal health of states in November 2007, not a single state gave a pessimistic appraisal of its prospects. Indeed, governors across the land were unveiling creative initiatives that seemed to ratify Supreme Court Justice Louis Brandeis’ famous declaration that states are laboratories of democracy.

Lou Cannon
Lou Cannon

The boldest plan came from California, where Gov. Arnold Schwarzenegger proposed a far-reaching health-care program that would have covered most of the uninsured. Five other states — Illinois, Missouri, New Mexico, New York and Pennsylvania — also planned to expand health insurance in significant ways. In Arizona, Gov. Janet Napolitano proposed free college tuition for every child in the state who graduated from high school with a B average. Washington talked of providing its citizens with paid family leave.

All these rosy ideas were blown away like autumn leaves by the housing collapse and the subsequent economic implosion. When the NCSL issued this year’s November report, California and 37 other states had budget gaps and many of them were trimming programs or freezing payrolls in an effort to reduce deficits.

“The state budget situation is grim and getting worse with each new revenue revision,” the report said.

Corina Eckl, director of fiscal programs for NCSL, said in an interview that the situation will become “frightening” in fiscal 2010, which for all but four states begins July 1. Every source of state revenue is plunging fast. As unemployment rises, income tax revenues decline. As housing foreclosures intensify and people spend less, sales tax revenues fall. States that depend on tourism, such as Hawaii and Nevada, have been hurt by a decline in travel. Even the handful of states, such as Texas and Wyoming, that are relatively well off because of income from resource taxes have been hurt by slumping oil prices. In Alaska, where the state budget was supposed to be perpetually balanced, a deficit opened this month after the price of oil dropped below $65 a barrel.

The plight of the states exacerbates a downturn that economists say has the potential to become the worst since the Great Depression. The human costs are high, particularly in jobless benefits and health-care services. Thirty states are at risk of having the funds that pay out unemployment benefits become insolvent by late spring or early summer; Indiana and Michigan are already borrowing funds from the federal government to make these payments. Several governors have asked Congress to provide additional funds for the Medicaid program that serves the poor and disabled. Testifying before Congress on Dec. 11, New Jersey Gov. Jon Corzine said the decline in revenues in his state had impacted child welfare agencies, prisons, and aid for people with developmental disabilities and mental illness. He asked for federal help for infrastructure projects he said were “shovel ready.”

At the same hearing Wisconsin Gov. Jim Doyle said he faced a $5.4 billion gap, 17 percent of the fiscal 2010 budget, despite a 10 percent cut in the state work force.

“We will be forced to cut the very tools and services that people depend on to pull them out of recession,” Doyle said.

In total shortfall, populous California is far and away the dubious leader. The Golden State anticipates a $41.8 billion budget gap by July 2010, nearly half the $86 billion in revenue the state expects to collect during the coming fiscal year. Unless the budget is soon balanced, warns state Treasurer Bill Lockyer, the state will need to shut down hundreds of public works projects — exactly the opposite of what it should be doing during a recession.

California’s troubles are only partially to blame on the economy; for years, the state’s dysfunctional Legislature failed to address a persistent structural deficit. The gimmick-laden budget passed this year by the Legislature after months of delay was out of balance before the ink was dry on the document. Still, a half-dozen states have larger budget gaps than California if measured as percentages of the general fund. Six states — Arizona, Georgia, Nevada, New Hampshire, Rhode Island and South Carolina — have deficits of more than 10 percent of their general funds, and the NCSL projects this number to grow to at least 15 states in 2010.

Since states are required to balance their budgets and the federal government is not, governors will be coming hat in hand to the incoming administration of President-elect Barack Obama in hope of bailouts. This is the reverse of the situation that faced the states during the early years of President Franklin D. Roosevelt’s “New Deal for the American people.” The federal safety net was virtually nonexistent when FDR came into office in 1933 — indeed, the New Deal created most of it, including Social Security. What little help there was for America’s jobless, a quarter of the work force, and for the poor came from the states.

“Practically all the things we’ve done in the federal government are like things Al Smith did as governor of New York,” FDR said early in 1936, when he would be re-elected by a landslide. And it wasn’t just New York. Animated by the Progressive movement, states such as California, Minnesota, New Jersey and Wisconsin early in the 20th century created unemployment insurance and welfare programs designed to cushion families in hard times. Now, during our Great Recession, the states are supplicants, as much as the banks and the insurance companies and the automakers.

Are there rays of light in this darkness? Perhaps.

States are no less likely than individuals to exaggerate the impact of both booms and busts. Scott Pattison, executive director of the National Association of Budget Officers and a former director of finance in Virginia, told stateline.org that he wondered if the forecasts that were once so rosy are now excessively grim and “might slightly overcorrect.” Beyond this possibility — which amounts to a hope that the recession will be shorter and milder than generally predicted — states may benefit from the gigantic federal stimulus that Obama has said he will propose to rebuild roads, bridges and other parts of the nation’s crumbling infrastructure. The conundrum, as The Economist observed, is “that it is hard to spend both rapidly and wisely.”

Clearly, Obama has a sense of this difficulty: he has pledged that his administration will choose the “best” projects based on overall utility rather than on political considerations. But this is not a promise Obama can redeem by himself. To succeed, he will necessarily rely on the recommendations of states, vital partners in America’s federal system. If the stimulus is to be spent wisely, states will have to do more than identify the projects that are, in Corzine’s words, shovel-ready to begin.

— Summerland resident Lou Cannon is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally.




comments powered by Disqus

» on 12.22.08 @ 07:32 AM

Wow, why don’t we get great articles like this in the broad media more often.  Thanks Lou Cannon.

» on 12.22.08 @ 11:06 AM

Maybe because most readers would rather not face reality?

» on 12.22.08 @ 11:43 AM

The legislature is dysfunctional because it is in the hip pocket of special interest groups, particularly a handful of Indian casino tribes who’s total enrollment is less than 2,600 members of fractional “Indian descendants”, many with questionable ancestry and many operating casinos on land that is legally inelligible for any gambling and is in direct violation of federal laws. This half dozen gambling tribes controlling a state of thirty eight million [38,000,000] million people!

Take for example State senator Batin from the Palm Springs area where there are over 5 “Indian” casinos in the vicinity. Last spring he sent a letter to Chairman Phillip Hogen of the National Indian Gaming Commission urging him to not change the rule for so called class II slot machines. He then got 20 other State Senators to sign it. The chairman had been proposing to change the rule to reclassify and include these type of facimile slot machines into class III gambling devices, which would have required tribes operating them everywhere to negotiate a tribal state-compact, in this case with the State of California.

That negotiation process is the only means a state can require payment of gambling proceeds to the state in lieu of taxes (Indian tribes are exempt from paying state and local taxes that fund the public infrastructure and public services they and their profitable businesses use regularly. It is also the only means the state can impose it’s other laws on the tribe as a condition to allowing class III gambling casinos to operate within the state.

Laws which, for example, require workers compensation and other protections for workers. Laws which hold a tribe legally responsible for injury, cheating or damages to it’s customers. Laws that protect the state and local environment, etc.  Because of a court created legal immunity doctrine for Indian tribes, established long ago by federal court cases, they could not otherwise be required to comply with these laws nor be sued for their mis-deeds and breaches of laws or for breaking any contracts they have made with non-Indians.

Commissionioner Hogen eventually withdrew the proposed rule change which, not surprisingly, was also vehemently opposed by Indian gambling interests.

Senator Batin acted and still acts, as a funnel for this Indian gambling money to other state politicians through his campaign committees like “The Friends of Jim Batin”. This method of pumping gambling revenues into the pockets of corrupt politicians lends new meaning to the term, it pays to have friends!

When the California Fair Political Practices Commission filed a multi-count complaint against Batin he set up a legal defense fund, funded by who? You guessed it, the Agua Caliente and Pechanga casino and other Indian gambling casinos. So we have 20 senators, half of the 40 total, willing to oppose a federal rule change that is directly in the best interest of the State of California to insure they will remain “friends of Jim Batin” and continue their politial gambling money largesse’.

When he was attorney general, thinking about running for governor, Bill Lockyer took a million dollars from a few Indian gambling tribes and their proxy PAC’s. The State Attorney General is the one person that is supposd to police Indian gambling operations along with the impotent Gambling Control Commission.  Neither has done anything about the criminal acitivity and corruption involved in Indian casino gambling and still don’t do anything.

In fact the corruption and manipulation is going on at even higher levels today because these casinos not only have common law legal immunity, they have purchased political immunity! Are we surprised?

Present day California law makers in Sacramento make the Tammany Hall scandals of a century ago look like pre-school!

We have a crisis in corruption in this country. Congressman Jefferson hiding $90,000 in cash in the freezer of his Louisianna home’s refrigerator. (lending new meaning to the expression “cold hard cash”) The governor of Illinois spewing vulgar profanity and trying to sell the soon to be vacated Obama Senate seat to the highest bidder. California State senator Perrata transfering over a million dollars from his campaign funds to his legal defense fund. You remember him. While he was majority leader and speaker in the state senate, he was caught spending thousands of dollars in campaign “contributions” in Europe on expensive clothes for himself and his family and friends and throwing lavish multi-thousand dollar parties. His son was just indicted for murder. Then there U.S. Senater Harry Reid convicted for openly remodeling his Alaska home as a bribe for return favors.  There is. opf course, the recent and unforgetable Jack Abramoff scandal, which is still unfolding, just to mention a few on the growing list of widespread corruption. As is often said, California leads the nation, but in this case it is in outright political corruption, nepotism and cronyism!

Unless and until something is done about this pay to play corruption in Sacramento and elsewhere, nothing good will come out of the California Legislature.

» on 12.23.08 @ 08:58 AM

Jax, it was Senator Stevenson not Harry Reid that was convicted in Alaska. Otherwise, I totally agree with you.

I would add that there seems to be a systemic problem in America with greed and corruption going hand and hand. Maybe we need to revisit our priorites, talk about ethics and the right thing to do? The cheating culture is a huge problem and is tearing our country down.  After all, success should not be measured by how much you have regardless of how you got it.

» on 12.24.08 @ 02:24 AM

Sorry C& A your right about Senator Reid. In my anger at the extent of corruption in the Politics of America I was thinking about Stevenson and Reid at the same time. Reid was only involved writing letters and influencing the Coushetta casino project in corrupt efforts to block another competing Indian Gambling casino from opening up.  I guess there is so much corruption abounding that it is hard to keep it straight!

» on 11.11.09 @ 04:10 PM

This makes me remember something funny that my cousin always said…
Obviously it is totally not appropriate right this moment…

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