Governors Seek Remedies for Shortfalls

Economy, Housing Crunch Ratchet Up Pressure on State Budgets Across the Nation

NEW YORK -- Faced with a weak national economy and a worsening housing crisis, a growing number of states are confronted with severe budget deficits, forcing some governors to come up with creative -- some say risky -- budget gimmicks to find new sources of cash.

At least 13 states -- led by California, New York and New Jersey -- are facing huge shortfalls for the next fiscal year, and about a dozen others are in serious financial difficulty, according to various budget estimates, reports from the governors, and a survey by the Center on Budget and Policy Priorities, a Washington think tank.

Unlike the federal government, most states are not allowed by their constitutions to run budget deficits, so legislatures convening for their 2008 sessions must make painful decisions about what programs to cut or which taxes to raise to close the gaps.

One of the main causes is fallout from the nation's housing crisis. Declining home sales, deflated property values and mounting foreclosures have caused a slide in states' tax receipts, helping push their budgets into deficit.

"It's amazing how sales tax revenues are tied to the housing market," said Iris J. Lav, deputy director of the Center on Budget and Policy Priorities. "People aren't buying construction materials; people aren't furnishing new homes. Some states also have real estate transfer taxes."

The biggest crisis is in California, where Gov. Arnold Schwarzenegger (R) has declared a fiscal emergency after reporting a $4.6 billion revenue shortfall that could grow to a $14 billion deficit by the 2009 fiscal year. Schwarzenegger proposed reducing every state program by 10 percent next year, eliminating cost-of-living adjustments and enacting budget revisions to reduce what he called "Sacramento's overspending."

In the Northeast, which leads the nation in declining home sales, some governors are trying creative, one-time budget gimmicks to raise badly needed cash to finance some of their favored long-term projects.

In New York, which is anticipating a $4 billion shortfall, Gov. Eliot L. Spitzer (D) is considering a plan to securitize, or sell off, a portion of the state's future lottery proceeds to start a $4 billion endowment for public universities.

In New Jersey, with a $3.5 billion shortfall and a $32 billion debt, Gov. Jon S. Corzine (D) has proposed drastically increasing the fees on the state's three toll roads, and issuing as much as $38 billion in bonds against future toll revenue. The money would be used to pay down the debt and make needed infrastructure improvements.

In Massachusetts, facing a $1.5 billion shortfall, Gov. Deval L. Patrick (D) is reportedly considering presenting a budget to the legislature this month that would count as revenue as much as $900 million from license fees from three new casinos. Patrick wants cash to support his plans to improve education in the state. But the idea of using the casino license fees has drawn criticism, because Patrick's casino plan has not yet been approved by the legislature, where there is strong opposition.

"It's completely irresponsible," said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation, a research group. "What are we doing using one-time revenue to close a fiscal gap?"

State governments went through a similar period of slow growth and belt-tightening during the slowdown that began with the bursting of the technology stock bubble and the Sept. 11, 2001, terrorist attacks on the World Trade Center and the Pentagon. That slowdown lasted until 2004, but states were able to weather it because property taxes remained high, lining the coffers of local governments.