Economy, Housing Crunch Ratchet Up Pressure on State Budgets Across the Nation
By Keith B. Richburg
Washington Post Staff Writer
Sunday, January 13, 2008
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.
This time, economists and analysts fear, the bursting of the property bubble will soon start to cause financial problems for localities dependent on property taxes -- and the localities will have to turn to state governments for aid.
The problem is exacerbated in New York and northern New Jersey because of the two states' heavy reliance on Wall Street's good fortunes to keep their own tax revenue high.
Some say the problem is overspending by state governments. And new governors in particular, such as Patrick and Spitzer, came into office with a list of plans to implement and promises they want to keep: in Spitzer's case, expanding health insurance for children, increasing the stock of middle-income housing and investing $1 billion in an Upstate economic development fund. Patrick wants to revive the cabinet-level post of education secretary and is exploring whether to offer in-state college tuition to the children of illegal immigrants who attend public schools.
Critics say the governors' one-time gimmicks to raise money mask the deeper budgetary problems. "They try to get more and more creative financially, but all of this can't replace budgetary responsibility," said Nicole Gelinas, a senior fellow with the Manhattan Institute, a New York think tank. "At some point, the checkbook has to balance. At some point, they'll run out of things to securitize or sell off."
Using creative methods to find cash is not new. During the last period of deficits, in 2001, some states raised money by securitizing their share of the large court settlements from tobacco companies. "The states took that money up front so they could close those budget deficits," Gelinas said.
Many of the governors have ruled out increasing taxes to cover the shortfalls, further limiting their options.
Spitzer, in his State of the State speech Wednesday in Albany, embraced the idea of imposing a ceiling on property taxes. In California, Schwarzenegger said, "I know that some people say that we should just raise taxes in order to fill the gap, but it would be wrong to raise taxes on people to cover Sacramento's overspending."
In New Jersey, Corzine said that if the legislature does not enact his plan for toll increases, the alternatives are to increase the sales tax by 30 percent, the income tax by 20 percent or the gas tax by 12 cents per gallon.
There is always an aversion to raising taxes during a recession.
The only other way for states to close the gap is by radically reducing spending, as Schwarzenegger is proposing in California. But according to some analysts, the states went through such painful cuts during the 2001 slowdown that there is not much left to trim.
The Center on Budget and Policy Priorities, a liberal think tank that advocates for the poor, reported that during the recession in 2001, about 34 states cut eligibility for public health programs, causing 1 million people to lose access to health care, and 34 states cut per-pupil aid to school districts in 2004, meaning higher costs for textbooks, shorter school days and fewer staff members. States also raised tuition at public colleges and universities.
"In general, state expenditures are below, on average, where they were prior to the last recession," said the center's Lav.
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