“Here’s what we know. The Wall Street Journal just ran an op-ed saying, don’t allow the federal government to help the states. That tells you that’s what they’re scared of. It would be economically brilliant, it would be politically brilliant, to bring back the revenue sharing provisions, which are, after all, a Republican idea, and make the Republicans make the call that they want a financial holocaust throughout America, and they want us to slip back into a recession.” stated William Black in a Democracy Now interview yesterday.
Earlier he had said,” Obama needs to go back to what he originally proposed, which was brilliant. It was a Republican idea: revenue sharing.”
In short, for nearly 4 years, one way to avoid many of the state level problems that have led to continued depression, recession, and lay-offs has been the return of the practice of revenue sharing (created originally by Nixon-era Republicans.)
This 2012 is the time to roll-back-clock on 30 years of bad government and financial practices, America. Force OBAMA to push through fair and just revenue sharing to unburden the states.
States Continue to Feel Recession’s Impact
By Elizabeth McNichol, Phil Oliff and Nicholas Johnson
State budget estimates for the upcoming fiscal year show that states still face a long and uncertain recovery. For fiscal year 2013, the fiscal year that begins July 1, 2012, 30 states have projected or have addressed shortfalls totaling $49 billion.[1]
The Great Recession that started in 2007 caused the largest collapse in state revenues on record. Since bottoming out in 2010, revenues have begun to grow again, but states are still far from fully recovered. As of the third quarter of 2011, state revenues remained 7 percent below pre-recession levels, and are not growing fast enough to recover fully soon.
Meanwhile, states’ education and health care obligations continue to grow. Next year, states expect to educate 350,000 more K-12 students and 1.7 million more public college and university students in the upcoming school year than in 2007-08.[2] And some 5.6 million more people are projected to be eligible for subsidized health insurance through Medicaid in 2012 than were enrolled in 2008, as employers have cancelled their coverage and people have lost jobs and wages.[3]
Consequently, even though the revenue outlook is trending upward, states are still addressing large budget shortfalls by historical standards as they consider budgets for the upcoming year. In some states with two-year budget cycles, projected shortfalls for fiscal year 2013 have already been closed through spending cuts and other measures scheduled to take effect in the next fiscal year, but in the majority of states they must be closed through legislative action in the coming months in order to meet balanced-budget requirements. Extremely large shortfalls addressed in recent years have led to deep cuts in critical public services like education, health care, and human services; the new shortfalls likely will prompt legislators to make further cuts in those areas on top of those already enacted.
So state budgets are poised to continue to be a drag on the national economy, threatening hundreds of thousands of private- and public-sector jobs, reducing the job creation that otherwise would be expected to occur. Potential strategies for lessening the impact of deep spending cuts include more use of state reserve funds in states that have reserves, more revenue through tax-law changes, and a greater role for the federal government.
Our survey of state fiscal conditions shows that:
States continue to face a major fiscal challenge. Thirty states have projected (and in some cases already closed) budget gaps totaling $49 billion for fiscal year 2013 (see Figure 1). These shortfalls are all the more daunting because states’ options for addressing them are fewer and more difficult than in recent years. Temporary aid to states enacted in early 2009 as part of the federal Recovery Act was enormously helpful in allowing states to avert some of the most harmful potential budget cuts in the 2009, 2010 and 2011 fiscal years. But the federal government allowed that aid to largely expire at the end of fiscal year 2011, leading to some of the deepest cuts to state services since the start of the recession. Far from providing additional assistance to states, the federal government is now moving ahead with spending cuts that will very likely make states’ fiscal situation even worse.
State finances are recovering, but slowly. The data show clearly that state finances are improving. Ten states have reported new shortfalls totaling $3.7 billion opening in their budgets for the current year (fiscal year 2012). This is less than the mid-year shortfalls states faced last year (fiscal year 2011), and dramatically lower than in fiscal year 2009 and fiscal year 2010. For next year, the shortfall totals for fiscal year 2013 are smaller than the totals from the last few years. But they remain large by historical standards, as the economy remains weak and unemployment is still high. (Note that even if economic improvement accelerates, state fiscal recovery tends to lag recovery in the broader economy.)
The shortfalls that states are projecting for fiscal years 2012 and 2013 are in addition to the more than $530 billion in shortfalls that states have already closed over the past four years.
State Budget Shortfalls in 2012 and 2013
States already have addressed extraordinarily large shortfalls as they developed and implemented spending plans for fiscal years 2009, 2010, 2011, and 2012. Shortfalls are the extent to which states’ revenues fall short of the cost of providing services. Every state except Vermont has some sort of balanced-budget law. So the shortfalls for 2009 through 2012 — which totaled more than $530 billion combined — have already been closed through a combination of spending cuts, withdrawals from reserves, revenue increases, and use of federal stimulus dollars. Moreover, a number of states with two-year budgets have already closed significant shortfalls for fiscal year 2013.
Figure 2 compares the size and duration of the shortfalls that resulted from the recession during the first decade of the 2000s to shortfalls reported to date following the onset of the latest recession. In the early 2000s, as in the early 1990s and early 1980s, state fiscal problems lasted for several years after the recession ended. The same has proven to be the case this time. The most recent recession was more severe — deeper and longer — than the previous one. State fiscal problems also have proven to be worse and are likely to remain so for the foreseeable future.
States’ fiscal conditions are improving along with the broader economy. But states are coming out of a very deep hole. Figure 3 illustrates the magnitude of the problem. State revenues have begun to rebound. State tax intake grew 8.3 percent in the 12-month period ending in June 2011 — the 2011 fiscal year for most states. This encouraging growth offers a glimmer of hope that states are beginning to climb out of the fiscal hole caused by the recession. Unfortunately, that hole was so deep that even if revenues continue to grow at last year’s rate — which is highly unlikely, as explained below — it would take seven years to get them back on a normal track.
In other words, revenues probably won’t come close to what states need to restore the programs that they cut during the recession unless states raise taxes, at least temporarily, or receive additional federal aid while the economy slowly recovers. As noted below, additional federal aid is unlikely.
Figure 3 shows how much states would be collecting if revenues had not dropped sharply due to the recession but instead had continued to grow at their historical rate of 5 percent. (The 5 percent rate is based on actual collections between 1980 and 2008, with adjustments for projected inflation and GDP growth.) It also shows that, at the 2011 rate of 8.3 percent, revenues wouldn’t get back on a normal track until 2019.
State tax collections typically grow faster than normal after a recession as they recover from a reduced base. But states haven’t seen sustained growth at an 8.3 percent level since the 1960s.
Beyond simply coming out of a deep hole, states face major obstacles that will slow their fiscal recovery. One is the shifting role of the federal government. It allowed emergency aid to states to largely expire at the end of fiscal year 2011, leaving states with fewer options to address their still substantial budget shortfalls in fiscal year 2012 and beyond. Moreover, the federal government has been moving ahead with spending cuts that will very likely reduce ongoing federal funding for state and local governments and make state fiscal conditions even worse.
Table 1:
States with FY2012 Mid-Year Gaps
FY12 Projected Shortfall Shortfall as Percent of FY12 Budget
Alabama $171 million 2.3%
California* $930 million 1.1%
Connecticut $145 million 0.8%
Illinois* $1.1 billion 3.1%
Kentucky $190 million 2.1%
Louisiana $198 million 2.4%
Maine $121 million 4.0%
New Jersey $325 million 1.1%
New York $350 million 0.6%
Washington* $214 million 1.4%
States Total $3.7 billion 1.4%
Note: Washington state’s shortfall total assumes that one-fourth of the state’s $855 million mid-biennium shortfall will be closed in fiscal year 2012. California’s shortfall is the amount of the “trigger” cuts that the state is making in fiscal year 2012. Illinois shortfall total reflects the anticipated shortfall between spending and revenues at the end of the fiscal year. It includes the estimated state share of the state’s unfunded Medicaid liability, which totals $750 million. It does not include a backlog of previous years’ General fund liabilities of more than $5 billion.
Another major obstacle to recovery is sluggish economic growth. Unemployment remains above 8 percent, and many economists expect it to stay at high levels throughout 2012 and beyond. Continued slow job growth will restrain the rise in state tax receipts. This is especially true for the sales tax. High unemployment and economic uncertainty, combined with households’ diminished wealth due to fallen property values, will continue to depress consumption, keeping sales tax receipts at low levels. If, as in past recessions, the incomes of the wealthy recover faster than those of low- and middle- income individuals and families, this would mitigate somewhat the effect of a sluggish job market on tax receipts, especially in states with progressive income taxes. Beyond depressing state revenue collections, the weak economy increases demand for Medicaid and other essential services that states provide. These factors suggest that state budget gaps will continue to be a problem for states for some time to come.
Table 2:
States with FY2013 Gaps
FY13 Budget Shortfall Closed Before Budget Adoption (States with 11-13 Budgets) Current FY13 Gap Projected Total Shortfall Amount Shortfall as Percent of FY12 Budget
Alabama 0 $690 million $690 million 9.4%
California* 0 $8.4 billion $8.4 billion 9.8%
Colorado 0 $598 million $598 million 8.4%
Connecticut a $2.7 billion 0 $2.7 billion 14.4%
District of Columbia 0 $53 million $53 million 0.8%
Florida 0 $2 billion $2 billion 8.4%
Hawaii a $500 million 0 $500 million 8.9%
Illinois* 0 $1.8 billion $1.8 billion 5.2%
Kentucky 0 $371 million $371 million 4.0%
Louisiana 0 $895 million $895 million 10.8%
Maine a $369 million $101 million $470 million 15.5%
Maryland 0 $1.0 billion $1.0 billion 6.9%
Massachusetts 0 $1.3 billion $1.3 billion 4.0%
Minnesota a $1.9 billion 0 $1.9 billion 11.6%
Mississippi 0 DK DK na
Missouri 0 $800 million $800 million 10.0%
Nebraska a $347 million 0 $347 million 10.0%
Nevada a $1.2 billion 0 $1.2 billion 37.0%
New Hampshire a $250 million 0 $250 million 20.0%
New York 0 $2.0 billion $2.0 billion 3.5%
North Carolina a $2.0 billion 0 $2.0 billion 10.2%
Ohio* a $3.0 billion 0 $3.0 billion 10.8%
Oregon* a $1.7 billion 0 $1.7 billion 24.0%
Pennsylvania 0 $746 million $746 million 2.7%
Rhode Island 0 $146 million $146 million 4.6%
Texas* a $9.0 billion 0 $9.0 billion 20.4%
Vermont 0 $75 million $75 million 6.1%
Virginia 0 $145 million $145 million 0.9%
Washington* a $2.5 billion $641 million $3.1 billion 19.6%
Wisconsin a $1.6 billion $143 million $1.7 billion 12.3%
States Total $27.0 billion $21.9 billion $48.9 billion 9.3%
(a) States in bold have two-year budgets ending in fiscal year 2013. These states have, for the most part, closed the shortfalls listed in this table. Maine, Washington, and Wisconsin’s numbers include additional shortfalls that have emerged after their budgets were enacted. “DK” indicates that a shortfall is projected but magnitude is not yet reported. *California’s shortfall includes a $3.4 billion gap carried forward from FY12. Oregon’s and Ohio’s shortfalls are one half of the states’ total projected shortfalls for the 2011-2013 biennium. Illinois’ shortfall includes’ the estimated state share of the state’s unfunded Medicaid liability, which totals $1.4 billion. It reflects an estimated policy baseline and does not incorporate the changes the governor proposed in his executive budget. It does not include the backlog of previous years’ General Fund liabilities.
Estimates of Ohio’s two-year shortfall range from $6 to $8 billion. Nevada’s shortfall is the midpoint of several estimates. Texas underfunded the state’s Medicaid program when it enacted its FY12-13 biennial budget, leaving a roughly $4 billion budget hole that will need to be filled in FY13. Washington’s shortfall total assumes that three-fourths of the state’s $855 million mid-biennium shortfall will be closed in FY13.
Table 1 lists the mid-year shortfalls that states have closed or anticipate closing for 2012.
The fiscal year 2013 shortfall projections illustrate the significant fiscal challenge that states continue to face. Thirty states have projected shortfalls totaling $49 billion for FY2013, the fiscal year that begins July 1, 2012 (See Table 2). These totals may be down somewhat from the daunting budget gaps of the last several years, but they are still very large by historical standards, especially four years after the recession ended.
These current and future shortfalls are in addition to the gaps that states have already closed in fiscal year 2012.
Overall, 42 states have closed shortfalls in 2012 totaling $103 billion. (See Table 3.)
Of course, an unexpected acceleration in the recovery could reduce the size of future shortfalls. But there are factors that could make it particularly difficult for states to recover from the current fiscal situation. For example, housing markets have been slow to fully recover; their decline has depressed consumption and sales tax revenue as people refrain from buying furniture, appliances, construction materials and the like. The weakness in the housing market has also depressed property tax revenue, which largely funds schools and local governments. Property tax collections were 4 percent lower in the 12-month period ending in September 2011 than in the previous 12 months. This places a strain on local governments’ budgets and makes it more likely that they will look to states to help them sustain funding for local services like education and police and fire protection.
Some states initially were not affected by the economic downturn, but the number has dwindled over time. Resource-rich states — such as New Mexico, Alaska and Montana — saw revenue growth in the beginning of the recession as a result of high oil prices. Later, however, the decline in oil prices affected revenues in these states. The economies of a handful of other states have so far been less affected by the national economic problems. Only two states, North Dakota and Montana, have not reported budget shortfalls in any of these years. One other state — Alaska—faced shortfalls in fiscal year 2010 but has not projected gaps for subsequent years.
The Consequences of Shortfalls
In states facing budget gaps, the consequences are severe in many cases — for residents as well as the economy. To date, budget difficulties have led at least 46 states to reduce services for their residents, including some of their most vulnerable families and individuals. [4] More than 30 states have raised taxes to at least some degree, in some cases quite significantly.
If revenue remains depressed, as is expected in many states, additional spending and service cuts are likely. Indeed a number of states that budget on a two-year basis have already made substantial cuts to balance their budgets for fiscal year 2013. Budget cuts often are more severe later in a state fiscal crisis, after largely depleted reserves are no longer an option for closing deficits.
Spending cuts are problematic during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.
Tax increases also remove demand from the economy by reducing the amount of money people have to spend. However to the extent these increases are on upper-income residents, that effect is minimized. This is because these residents tend to save a larger share of their income, and thus much of the money generated by a tax increase on upper income residents comes from savings and so does not diminish economic activity. At the state level, a balanced approach to closing deficits — raising taxes along with enacting budget cuts — is needed to close state budget gaps in order to maintain important services while minimizing harmful effects on the economy.
Ultimately, the actions needed to address state budget shortfalls place a considerable number of jobs at risk.
The roughly $49 billion shortfall that states are facing for fiscal year 2013 equals about 0.32 percent of GDP. Assuming that economic activity declines by one dollar for every dollar that states cut spending or raise taxes, and based on a rule of thumb that a one percentage point loss of GDP costs the economy 1 million jobs, the state shortfalls projected to date could prevent the creation of 320,000 public- and private-sector jobs next year.
The Role of the Federal Government
Federal assistance lessened the extent to which states needed to take actions that further harmed the economy. The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, included substantial assistance for states. The amount in ARRA to help states maintain current activities was about $135 billion to $140 billion over a roughly 2½-year period — or between 30 percent and 40 percent of projected state shortfalls for fiscal years 2009, 2010, and 2011. Most of this money was in the form of increased Medicaid funding and a “State Fiscal Stabilization Fund.” (There were also other streams of funding in the Recovery Act flowing through states to local governments or individuals, but these will not address state budget shortfalls.) This money reduced the extent of state spending cuts and state tax and fee increases.
In addition, H.R. 1586 — the August 2010 jobs bill — extended enhanced Medicaid funding for six months, through June 2011, and added $10 billion to the State Fiscal Stabilization Fund. Even with this extension, federal assistance largely ended before state budget gaps had fully abated. The Medicaid funds expired in June 2011, the end of the 2011 fiscal year in most states,[5] and states had drawn down most of their State Fiscal Stabilization Fund allocations by then as well. So even though significant budget gaps remained in 2012, there was little federal money available to close them. Partially as a result, states’ final 2012 budgets contain some of the deepest spending cuts since the start of the recession.
One way to avert these kinds of cuts, as well as additional tax increases, would have been for the federal government to reduce state budget gaps by extending the Medicaid funds for as long as state fiscal conditions are expected to be problematic.
But far from extending this aid, federal policymakers are moving ahead with plans to cut ongoing federal funding for states and localities, thereby making state fiscal conditions even worse. The federal government has already cut non-defense discretionary spending by nine percent in real terms since 2010. Discretionary spending caps established in the federal debt limit deal this past summer will result in an additional six percent cut by the end of the next decade. The additional cut by the end of the next decade would grow to 11 percent if sequestration — the automatic, across the board cuts also established in the debt limit deal — is allowed to take effect.
