As State Budgets Rebound, Federal Cuts Could Pose Danger
Published: December 14, 2012 180 Comments
- After years of budget cuts and sluggish recovery, states expect to see their revenues climb back to pre-recession levels this year for the first time since the financial crisis hit. But even as some states hope to restore some of the deep spending cuts they have made, they face a new threat.
Toby Talbot/Associated Press
Gov. Dannel P. Malloy of Connecticut warns of cuts that “will have a real impact on people’s lives.”
Those worries cloud a year that should be a turning point of sorts for the states. A fiscal survey of states released Friday by the National Governors Association and the National Association of State Budget Officers found that states expect to collect $692.8 billion in general fund revenues this fiscal year, which is more than they collected in 2008, the last fiscal year before the recession.
That is good news, but perhaps not as good as it initially appears. Adjusted for inflation, this year’s revenues are still expected to be 7.9 percent below the 2008 levels. And with Medicaid costs continuing to rise — states now spend more on Medicaid than on elementary and high school education — states find themselves hard-pressed to restore many of the deep cuts they have made to other services.
Now many governors are bracing for the prospect of cuts in federal aid, which provided states with roughly a third of their revenue last year.
“What we’re really seeing here is there is not enough money to make up for any federal cuts,” said Scott D. Pattison, the executive director of the state budget officers’ association. “What I’ve heard from the state budget people is that they’ve told departments and agencies in state government: Do not expect us to have the money available, even if we wanted to, to make up for federal cuts.”
The slow recovery is uneven, the fiscal survey found: 21 states are still not collecting as much revenue as they did before the recession, and almost half are spending less than they did before the recession. With Medicaid costs continuing to rise, many states were forced to continue to make cuts in other areas. The survey found that while states are spending more on Medicaid and elementary and secondary education this year, they are still cutting higher education, public assistance and corrections. Transportation spending is roughly flat.
The pressure states are under can be seen in some of the actions they are taking. Pennsylvania is thinking of privatizing the management of its lucrative state lottery, and is weighing a bid from the company that runs the National Lottery in Britain. Connecticut is planning another round of cuts that Gov. Dannel P. Malloy warns “will have a real impact on people’s lives.” Ohio, which, like many states, has struggled to find money to maintain and improve its highways, announced a plan on Thursday to borrow against future toll revenues to pay for transportation projects.
Some services may never rebound from recent cuts, Mr. Pattison said, as states spend a bigger share of their limited resources on health care and education. “In most states, I think, parks and recreation will never get back to the general fund levels they had in the past,” he said. “They’ll be primarily funded by fees: campsite fees, admission fees, things like that. It’s a small part of the pie, but I think it’s an example of an area of state government that’s just suffered in the recession and is not going to see a return, because the focus will be on these other areas.”
Dan Crippen, the executive director of the National Governors Association, characterized the slow growth in state revenues this way: “While up is certainly better than down, no one is out singing ‘Happy Days Are Here Again.’ ”
States fear the outcome of the budget talks between President Obama and Congress, whether a deal is reached by the end of the year or not.
“If Congress fails to act by the end of the calendar year, federal funds flowing to states would decline under the process of automatic across-the-board spending cuts known as sequester,” the report, the Fiscal Survey of States, warns. “But even if a sequester is avoided, the likely policies required to address the nation’s long-term fiscal debt problems may also reduce the level of federal funds for states.”
Mr. Crippen said that governors had been meeting with federal officials to try to make sure that they understood how changing the tax code or cutting federal spending would affect states.
Capping deductions for state and local taxes, he said, would have big ramifications for some states. Ending the tax exemption for municipal bonds could raise borrowing costs. If planned spending cuts to the military are allowed to take effect next year, it could hurt the economies of states heavily reliant on military spending. And if those cuts are averted, they could be replaced with more cuts to state grants.
“States understand that there are going to be reduced resources to states coming from thefederal budget,” Mr. Crippen said. “States are going to need, as these programs get revamped and cut, a lot more discretion if they’re going to provide the same level, or even near the same level, of services that they’re providing today.”
The fiscal woes of states have been raising concern in recent years. Paul A. Volcker, the former chairman of the Federal Reserve, and Richard Ravitch, the former New York lieutenant governor, formed a State Budget Crisis Task Force to shine a spotlight on the issue.
As the group released its findings on New Jersey’s fiscal problems in Trenton on Thursday, Mr. Ravitch said he had been stunned to learn that after the financial turmoil of 2008 no one in federal government was keeping close track of state and local fiscal troubles, since those levels of government employ about 19 million people and pay for 70 percent of America’s infrastructure.
“If we don’t solve this,” he said, “it’s our democratic process that’s going to be in the greatest jeopardy.”