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.
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.