2009 Budget Battles Loom for TBED as More States Anticipate Red Ink

Listen or read the business news media and the dreaded “R” word, recession, is back in common parlance. State revenue cycles seem to feel it first. Already, with more than a dozen states projecting budget deficits for both current and coming fiscal years, it seems certain: Spending cuts in programs and services and/or tax increases are imminent. The nationwide housing market slump, the rising cost of energy and health care, and increased state spending are cited as a just a few of the reasons for shortfalls in state budgets. The lack of a fiscal year 2008 federal budget, now nearly one-quarter over, does not help state fiscal planning.

 

In June, the Government Accountability Office released State and Local Governments: Persistent Fiscal Challenges Will Likely Emerge within the Next Decade, which found that an unexpected explosion in health-related expenditures combined with no new policy changes will result in fiscal challenges for state and local governments over at least the next 10 years (see the Aug. 8, 2007 issue of the Digest).

 

Then, last week, the U.S. Conference of Mayors released a report forecasting a continued national economic slowdown into the coming year, negatively impacting state and local revenue. Addressing the fiscal impact of the mortgage crisis, the report predicts “profound economic effects” in 2008, including a $166 billion loss in U.S. gross domestic product and 524,000 fewer jobs created across the nation. State and local government revenue sources will be affected as local property tax growth generated from real estate values slows, consumer spending on taxable goods declines, and state revenues from realty transfer fees are diminished, the report states. 

 

And today, a report released by the National Association of State Budget Officers (NASBO) finds that although state fiscal conditions remained strong for most states in FY07, state spending growth is expected to be below the historical average in FY08 and many states face significant challenges in health care expenditures. The Fall 2007 Fiscal Survey of States reports overall conditions across the states varied widely in FY07, with some states cutting taxes and increasing funding for programs while others relied on budget stabilization funds and spending cuts to address lower-than-anticipated revenues.

 

While the outlook is certainly grim, conditions are not expected to be as harsh as the 2001-03 period following the national recession, during which time states were forced to close $264 billion in budget gaps over five years, according to an article in Stateline.org. Scott Pattison, executive director of NASBO, said in the article that states enjoyed a higher-than-normal growth rate in tax revenue over the past few years and are getting back to normal rates.

 

In the coming months, governors from across the nation will present their State of the State Addresses and release their budget recommendations – a key time to unveil new and expanded TBED programs.

 

While it remains to be seen what states can and cannot afford to fund, TBED programs have proven not exempt from the chopping block when revenues were tight across the country before. Shoring up and securing client and legislative support should be happening now for most states, regardless of their financial forecast. Following is a synopsis of recent news announcing budget deficits throughout the states and possible short- and long-term solutions from state officials.

 

Arizona

With a projected $600 million shortfall in the current two-year budget cycle, Gov. Janet Napolitano’s Office of Strategic Planning and Budgeting released in September a Budget Management Plan focusing on strategies to reduce state agency spending, capital financing in place of paying cash for school construction, and tapping into the state savings account. Current projections reveal the deficit is closer to $800 million and could reach $1.5 billion by January. Gov. Napolitano announced last month that tax collections continue to run far behind what was anticipated when lawmakers passed the budget earlier this year, according to an article in the Arizona Daily Star. The article states that Gov. Napolitano plans to present lawmakers with a plan to bring the budget into balance without raising revenues.

 

California

The nonpartisan Legislative Analyst’s Office released last month the Tax Expenditures Review, revealing that under existing conditions, the state would end the current fiscal year with a $1.9 billion deficit. Additionally, the state faces an $8 billion shortfall in FY 2008-09. When the FY 2007-08 budget was enacted in August, the budget plan focused on closing the gap between general fund revenues and expenditures for the fiscal year and maintaining a $4.1 billion reserve; however, since that time, the budget situation has deteriorated by almost $6 billion, according to the report. This is attributed to continued “softness” in the state’s economy lowering forecast of revenues, lower property taxes, a likely delay in the sale of a government agency, delayed implementation of new tribal gambling compacts, and a court-ordered payment to the state’s teacher retirement system. In FY 2008-09, revenues are projected to grow by 4.6 percent, while spending is projected to grow at 7 percent. In order to balance the FY 2008-09 budget, the state will have to adopt nearly $10 billion in solutions, the report states.

 

Florida

Gov. Charlie Crist convened a special legislative session in September to address an impending budget deficit that analysts have called the worst the state has faced since 2001, according to an article in the Miami Herald. In October, lawmakers approved $1.1 billion in budget cuts to balance the current fiscal year budget. The plan included a 5 percent increase for university and community college tuition and additional cuts were made in health care and the court system. If the housing market continues to remain stagnant as predicted, economists foresee a $2.5 billion deficit for the FY09 budget year. Florida, which has no state income tax, is one of several states to be severely affected by the declining housing market because of its reliance on real estate taxes.

 

Maine

With the start of a new legislative session in January, lawmakers are challenged with filling a $95.2 million deficit in the general fund over the 2008-09 biennium. The state’s Revenue Forecasting Committee released last month its revenue projections through fiscal years ending 2011 for the general fund, highway fund, fund for a healthy Maine and medicaid-dedicated revenue taxes. While Maine has not been as severely affected by the sub-prime mortgage crisis as other states, the skyrocketing cost of oil poses a significant problem for the state’s economy, according to the document. The decrease in general fund revenue was led by sales and use tax revenues, which were down $21 million for FY08 and $19.6 million in FY09. The only major tax line to show improvement in FY08 was the individual income tax, which was raised by $18 million.

 

Maryland

Facing a $1.7 billion structural deficit, Gov. Martin O’ Malley convened a special session in October to cut spending and reform Maryland’s tax structure. Last month, the governor signed legislation containing $1.3 billion in tax increases and approved a voter referendum that allows Maryland to capture an additional $700 million in slots revenue. The measure will be placed on the ballot in November 2008. Under SB 2, the Tax Reform Act of 2007, the state sales tax and vehicle title will increase by 1 percent, the corporate income tax will be raised from 7 percent to 8.25 percent, the state income tax rates for higher income earners will be raised, and the tobacco tax will be doubled to $2 per pack of cigarettes.

 

Massachusetts

Administration and Finance Secretary Leslie Kirwan announced last month the state is facing a $1.3 billion FY09 budget shortfall, adding that the state will likely have to dip into reserves to balance this year’s budget, according to an article in the Boston Globe. The article states that Kirwan told reporters the state is suffering from a “spending problem.” Gov. Deveal Patrick has introduced in the past proposals to sanction casinos, allow more local option taxes, and raise corporate taxes. Kirwan said in the article that state agencies are facing nearly $400 million in projected deficiencies and that lottery revenue shortfalls will likely fall below $200 million. Gov. Patrick’s budget recommendation is expected in January.

 

Michigan

Fiscal analysts are predicting a budget shortfall of about $500 million in FY09, according to an article in the Detroit News. Lawmakers recently approved $1.5 billion in tax increases to fill a deficit for FY08 (see the Nov. 7, 2007 issue of the Digest). Soaring health care and prison costs and a drop in state revenue are just a few reasons for the downfall. On the upside, the state could save $200 million if changes in federal reimbursement for Medicaid occur, the article states.

 

Minnesota

Minnesota is expecting a $373 million deficit for FY 2008-09, according to a fiscal report released last week by the Minnesota Department of Finance. Gov. Tim Pawlenty said in a press release that the shortfall is manageable, amounting to approximately 1 percent of the state general fund budget. State government should halt spending and not raise taxes as a solution, Gov. Pawlenty said. The report also projects a structural shortfall of $211 million for the next biennium.

 

Nevada

Last month, a memo was issued by Andrew Klinger, director of the Nevada Department of Administration, directing an increase from 5 percent to 8 percent in the amount agencies may lose from their budget reserves. The memo explains that the Budget Division has deemed the cuts necessary based on revised projections of the general fund shortfall for FY 2008-09. The increase will reduce general fund spending by state agencies by $286.1 million. Agencies are asked to submit recommendations for making those cuts by Dec. 5. The 3 percent increase brings the total reduction in line with the projection of how much the sales and use tax will actually fall short, according to an article in Nevada Appeal. In October, the Department of Taxation released data that indicate gaming and sales tax revenue was down for the fiscal year by $21 million, and projections compiled by the State Executive Budget Division indicated lower than expected revenues for this and next fiscal year. Gov. Gibbons requested all state agencies to institute a hiring freeze and identify reductions in anticipated spending.

 

New Jersey

Gov. Jon Corzine is expected to unveil his budget proposal for FY09 in January, which is not expected to include funding for new programs as previously anticipated. New Jersey is $3 billion short for FY09, and in October, the governor asked his Cabinet to find ways to cut spending, according to The Star Ledger. State debt has doubled since 2000 and is costing about $3 billion this year, according to the article. A new proposal would pay at least half of the $32 billion in state debt by increasing highway tolls.

 

New York

The New York State budget office released last month the 2007 Joint Report Receipts and Disbursements, projecting a general fund budget gap of $4.3 billion in FY 2008-09 and $6.2 billion in 2009-10, absent gap-closing actions. Based on current data, the budget shortfall is attributed to declining revenues from Wall Street, which the state typically relies on for 20 percent of its annual tax revenues, the ongoing housing market contraction, and uncertain credit market conditions. The report forecasts that national and state economic growth will grow modestly in 2008. The revenue outlook for the current and upcoming fiscal year remains uncertain given the current economic and Wall Street turbulence, the report states.

 

Rhode Island

Rhode Island faces a budget deficit of $400 million to $450 million in the next fiscal year -- nearly double Gov. Donald Carcieri’s original projection. The state is currently facing a budget shortfall of $150 million in the current fiscal year. Last month, Gov. Carcieri released a list of 483 state positions being eliminated or targeted for elimination. The state has targeted a total of 536 positions to be eliminated either immediately or through the course of the current fiscal year. The job cuts are projected to save about $41.6 million per year beginning next fiscal year, according to the governor’s office. The goal is to achieve approximately $100 million per year in savings by reducing the size of the state workforce, beginning in FY09. The governor will consider major additional cuts to meet his legal requirement to propose a balanced state budget in the coming year. A representative from the Department of Labor and Training testified last month that job growth – particularly in the manufacturing sector – has significantly slowed, resulting in less income tax revenue, according to an Associated Press article.

 

Tennessee

Last month, the Department of Finance and Administration reported that significant corporate tax refund requests led to a $100 million shortfall in October collections. Finance and Administration Secretary Dave Goetz said in a press release, “Continuing to be conservative is critical as we begin to navigate what appears to be a softening economy.” Year-to-date collections for three months were $135.9 million less than the budgeted estimate. The state may consider using money from the reserve fund, leading to spending cuts on state programs if sales and corporate taxes do not rebound.

 

Virginia

In anticipation of a $641 million budget shortfall in its current two-year budget cycle, Virginia Gov. Tim Kaine outlined steps to cut spending earlier this year. In a speech to the Senate Finance, House Finance and House Appropriations Committee, Gov. Kaine said Virginia is seeing signs of slower rate growths in jobs and income and faces significant challenges in the next biennial budget, as expenses grow in some of the state’s largest programs. To address the shortfall, Gov. Kaine directed agencies to cut spending by 5 percent and curtail any discretionary spending. Gov. Kaine said using short-term strategies to balance the budget in the current biennium will not put the state in the position it needs to be in for the next biennium. To this end, the governor will closely examine current programs for the next budget cycle to determine if they should be changed or discontinued.