States Straining To Repair Budgets
Huge Deficits Challenge Lawmakers

By Peter Slevin
Washington Post Staff Writer
Tuesday, July 7, 2009

CHICAGO, July 6 -- Illinois has stopped paying $1,655 a funeral to bury the indigent dead. California is issuing IOUs in place of tax refunds. Ohio's rainy-day fund has dwindled from nearly $1 billion to exactly 89 cents.

Nearly a week into the new budget year, all three states are stymied, unable to balance their books and unable to decide whether to fill the huge gaps with tax increases, spending cuts or both. Either way, it will hurt.

Politicians, feeling the pressure from state employees and constituents, are sniping at one another and deploying their legislative tools. California Gov. Arnold Schwarzenegger (R) vetoed a budget because it included tax increases. Illinois Gov. Patrick Quinn (D) vetoed one because it didn't.

Mississippi used a last-minute sleight of hand to make the numbers work, passing a budget that left the state's utility regulatory agency and public service commission unfunded. Connecticut's 50,000 employees will take seven unpaid furlough days in the next two years.

Arizona's Republican governor called the Republican-led legislature into special session on Monday after the two sides failed to agree on the fate of a sales tax hike. Ohio Gov. Ted Strickland (D) said the state is losing money every day its two-year budget goes unpassed and called on lawmakers "to bring their pizza and pillows to the statehouse."

"For a lot of people, there is a continuing failure to recognize the severity of what is happening with this economy," Strickland said in a telephone interview from Columbus. "Programs will be reduced. Some programs will be eliminated."

Billions in federal stimulus dollars have kept cuts from being worse, Strickland said, but there is no magical cure for budget ills largely caused by plummeting tax revenues. The combination of a sour economy and balanced-budget requirements is forcing states to live with smaller budgets at a time when demand for services is increasing.

Ohio's unemployment rate is 10.8 percent "and going upward," Strickland said. For the next two years, he projects a $3.2 billion deficit that would be met with $2.4 billion in cuts and $933 million in estimated revenue from new video lottery terminals at racetracks.

In California, the budget hole was $24 billion until the government missed its July 1 deadline to have a new budget in place. Now, Schwarzenegger told reporters on Monday, the gap is $26.3 billion.

"It has reached across the country. State revenues have been pummeled," said Todd Haggerty, a research analyst at the National Conference of State Legislatures. He said 44 states reported cash shortfalls in the last budget year, with 31 already projecting gaps for the fiscal year beginning next summer.

"You're seeing pretty much anything and everything on the table because of how broad and how deep the recession is," said Haggerty, who is based in Denver. "Program cuts, agency cuts, furloughs, hiring freezes, salary freezes, layoffs."

California started issuing IOUs last week. The first ones went to people owed tax refunds. Others may go to vendors and local governments. Rod Brown, president of the California Bankers Association, said the IOUs, formally called warrants, pose a dilemma for his members.

"Given the poor credit rating of California -- the worst in the nation -- banks may be hesitant to extend credit to the state," Brown said in a prepared statement. He said there is no certainty that state money will be available in October, when the warrants come due.

Pennsylvania leaders failed for the seventh straight year to produce a budget on time. This year, the state is facing a $3.2 billion deficit and no spending and revenue plan to match. State employees have been told to keep coming to work, though their next paychecks may be smaller than usual. The government urged workers to apply for a line of credit.

The Republican-controlled Senate wants to close the gap with budget cuts, while Democratic Gov. Edward G. Rendell proposed a $2 billion spending cut and an array of tax increases, including a temporary personal income tax increase from 3.07 percent to 3.57 percent.

"We're at the beginning of the pain," said Sharon Ward, director of the nonpartisan Pennsylvania Budget and Policy Center. She fears education and health care will be hit hard. "The real question is whether the legislature wants to push people into the hole and watch them fall and crack, or whether they want to break the fall?"

With increasing urgency, Illinois service providers are asking the same question, as is Quinn, who took office in late January after the impeachment of his predecessor, Rod Blagojevich. Despite missing last week's deadline, legislators have gone home and are not due in the capital of Springfield again until July 14, the day before the next round of state checks is due to be issued.

"Illinois is in terrible, terrible shape. We have agencies laying off staff. We have services discontinued," said Maria Whelan, president of Illinois Action for Children, a Chicago-based service agency. She said organizations are now spending money for payroll and operations "at their own risk."

Whelan called Quinn's veto of a partial budget "an act of absolute courage," but said as long as the budget fight remains unresolved, the money flowing out the door is cash the providers "may or may not ever see again."

Rich Miller, editor of the Capitol Fax Blog in Springfield, wrote the other day, "Who is to blame? As always, it's really everybody."

The Obama administration has studied several Capitol Hill proposals to help the states but has decided not to move forward on any of them, according to an authoritative government source who spoke on the condition of anonymity because no announcement has been made about the discussions, which were private. One idea was to let struggling local governments borrow at lower rates from the municipal bond market.

Earlier this year, high-level meetings in the White House to address California's fiscal calamity yielded no intervention, partly because policymakers feared that bailing out one state would create a cascade of demands from across the country. The administration continues to monitor the situation, however.

In the meantime, devising a workable spending plan amid so much uncertainty requires "a constant recalculation of the pain-gain quotient," said Susan K. Urahn, managing director of the Pew Center on the States. And as long as budgets remain unpassed, she said, "the pain will continue to mount."

Are the cuts hurting real people?

"Absolutely," Strickland said. "No question about it."

Haymarket Center, a Chicago drug treatment agency, will have to lay off 175 people, nearly half its staff, if budget cuts proceed as planned, said Anthony A. Cole, the agency's vice president.

"It's a public health issue, a public safety issue, a tragedy for not just the 6,000 people but their families," said Cole, adding that workers are anxious, too. "The staff has been on pins and needles knowing that through no fault of their own they might lose their livelihood."

Staff writers David Cho in Washington, Kari Lydersen in Chicago and Robin Shulman in New York contributed to this report.

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