World War II jolted the U.S. out of its last massive financial crisis, but with no global war to propel a recovery this time states are scrambling to staunch the red ink splashing across their budget sheets.
In state after state, politicians and budget officers are dealing with dangerous declines in revenue that reach beyond the national recession – the billions of federal stimulus dollars pumped into state governments are only delaying the worst.
In fact, many states’ fiscal straits have reached uncharted waters: In Minnesota, officials are battling their first-ever decline in revenue from one two-year budget period to the next.
From fiscal fiscal 2009 to fiscal 2010, New York’s revenue crashed by nearly 34 percent.
In Arizona, one long-time lobbyist is predicting the state will drop into insolvency. Now, that’s a dire prediction, but not a shocking one given states’ financial crises.
The recession already has lasted 19 months and the budget gap for all states since it began has reached $268.6 billion, according to the National Conference of State Legislatures’ July 2009 report on state budgets. The combined shortfall for states could top $348 billion in fiscal 2011 and fiscal 2012.
But it doesn’t end there.
Some noted economists speculate that the economy will hit bottom sometime this year, which means budgets for fiscal 2010 and fiscal 2011 are likely to be among the most challenging for lawmakers, according to the NCSL report. But financial trouble could linger even longer if the recession continues or if the economy is slow to recover.
“This all underscores an unfortunate fact: Without a doubt, lawmakers’ endurance to resolve extraordinary fiscal problems will be tested for years to come,” NCSL reports.
Dennis Hoffman, a professor of economics at Arizona State University, says Arizona and other states facing a deficit that amounts to a large percentage of their general fund will have to consider reforming their tax structures as they approach 2011 and 2012. The financial problems won’t disappear, and the economy isn’t expected to bounce back in a way that will allow policymakers to avoid difficult decisions. Cutting little by little, or even large reductions in spending, won’t solve the problem, Hoffman says.
“If you propose a tax structure with a lower rate, but a larger base, taxes would be far more predictable and far more stable. These things are just arithmetic. It’s really not that challenging. The political challenge is what’s tough,” he says.
Lawmakers in Arizona, for instance, have shown that they lack the political will to make meaningful changes that would alter the revenue picture in the coming years, and they have balked at letting voters decide for themselves whether public services are more important than keeping taxes at their current levels.
The problems of fiscal 2010 are likely to continue for the next couple of years.
“It’s going to repeat itself – we could go Groundhog Day on this, and it would be the same movie over and over again – unless we get a new revenue structure in place,” Hoffman says. “Whatever changes are made need to be focused around some sane principles of revenue stability, coupled with some type of measure of the public’s preference for spending. What do they want to spend the money on?”
Even when the U.S. rises out of the worst recession since the Great Depression – the panacea many states are banking on – state governments will continue to see the red ink flow because revenue increases usually lag behind national economic recoveries.
“The next 18 months to two years for states looks very bleak,” says Scott Pattison, executive director of the Washington, D.C.-based National Association of State Budget Officers.
Spending on public pensions, education, public safety, health care and other services are financial obligations that will continue to beleaguer states. But states haven’t been able to address the long-term costs of such vital programs because of the budget emergency.
“They have basically been put on the backburner while states deal with the immediate problem that is staring them in the face,” says Sujit CanagaRetna, senior fiscal analyst for the Lexington, Ky.-based Council of State Governments.
The fiscal difficulties owe in part to the decades-long transformation of the nation’s economy from manufacturing to services. Many states haven’t adapted their tax policies to capture revenue on services. At the same time, manufacturing has withered.
“There is this leaky roof, you’re putting a pan and hoping the pan will collect water when you really have to replace the roof,” CanagaRetna says.
The challenge state governments have is to uncover “innovative ways” to provide services and obtain the revenue to pay for those services in a radically changed environment, argues David Wyss, chief economist for Standard & Poor’s in New York City.
Wyss points to the example of Dartmouth, Mass., which implemented a program called Pay-As-You-Throw, in which residents pay between $5 and $10 for a roll of garbage bags. The policy, designed to curb rising municipal solid waste costs, brought in more revenues through the fee and provided an incentive to recycle rather than throw things in the landfill.
“That’s the kind of thing (governments) can do. Other things run into conflict,” Wyss says.
But politicians are the ones making the spending decisions for state governments – and they generally avoid conflict like the plague. Politicians are known more for preserving their political careers than for doing what’s good in the long-term for their states.
Gary Moncrief, a professor of political science at Boise State University in Idaho, which is reeling from a 15-percent decline in revenue, says state lawmakers need to shed their political blinders to deal with the daunting budgets to come.
“I am not at all sure that the public recognizes the severity of the situation for next year. And we are going to need creative political leadership – not dogmatic ideologues – to forge a solution that does the least damage to the long-term viability of the state.”
Economist Martin Cantor, director of the Long Island Economic and Social Policy Institute at Dowling College, says with 2010 being an election year for the state Senate in New York, no one in the Legislature is going to propose a vote for any tax increases, much less major changes that need to be made to school financing or state employee pensions.
“Those are the big things. Those are where there are billions of dollars,” Cantor says. “But they’re not going to enact anything that bold. Government officials don’t have enough courage to do what’s right; they’re too busy doing what they do to get re-elected. That’s why nothing ever gets done.”
Lawmakers will face opposition from a diverse array of interests if they pursue significant, structural fiscal reform, but they have no choice – they have to come up with a plan to finance government in an environment in which there’s much less money to go around, Pattison says.
“The answer is you’re going to have less. There should be more focus on which programs are producing results.”
But that probably won’t happen right away. Pattison sees structural government reform happening incrementally over years rather than immediately in a single legislative session.
“I’m a big believer of (changing things) incrementally. It will start to happen anyway because resources are so limited for states,” Pattison says.
Still, the reality is that states are overdue for fiscal reform. “I think time is our enemy to the extent that there are some things we could be doing today,” says former Minnesota Department of Finance Commissioner Peggy Ingison.
Indeed, some are working hard to push fiscal reform, but it’s not the politicians – it’s the think-tanks and nonprofits.
Last spring, as the Democratic-controlled Minnesota Legislature was wrangling with GOP Gov. Tim Pawlenty over the budget crisis, five of Minnesota’s largest foundations contracted with the St. Paul-based Public Strategies Group to develop ideas for transforming Minnesota’s “financing and delivery of public services.”
The result was a report issued in March that came up with nine ideas. The suggestions include focusing state spending on health outcomes rather than services, developing a regional approach to county human-service delivery, and providing choice and competition in local governments to improve quality and costs.
And Minnesota’s foundations are not the only ones investigating state government transformation: the Pew Center on the States is starting a study of what six states wrestling with long-term, structural budget imbalances are doing to uncover transformative ideas.
One of the states is Arizona. Perhaps the Pew study will push the Grand Canyon State toward real reform.
Arizona needs the push.
ASU’s Hoffman said the solution is to decide what the revenue will be and base the budget around that, then determine which public services would be the next highest priority and allow voters to decide whether to raise taxes to pay for them. Since the Arizona Legislature has refused to allow a sales tax increase election, he said a citizens’ initiative might be an alternative.
“Unfortunately I don’t have any evidence that there’s enough political will in the Legislature to get that done,” Hoffman said. “There’s a political divide, which makes it pretty tough to get anything done. When I start thinking about what’s feasible, I think it’s going to have to be the people who have to take this on.”
– Dolan Media Co. Reporters Bill Clements and Charlie Shaw contributed to this report.
Read: Budget gloom: Billion-dollar deficits will plague Ariz. through 2013
Tags:budget problems, Arizona, Dennis Hoffman, recession, FY10 budget, Minnesota
