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Editor's Notebook: Despite good economic news the states are still staring down budget woes

Peggy Boyer Long
WUIS/Illinois Issues

The running joke at this summer’s annual conference of state government reporters was that the recession is over. Economists with the National Bureau of Economic Research, a nonprofit organization, say it ended in November 2001.

 

Corina Eckl, a fiscal expert with the National Conference of State Legislatures, calls this the good news that doesn’t make us feel any better. But for many of the 120 journalists who attended the national meeting of the Association of Capitol Reporters and Editors in Minneapolis last month, the punchline to the joke is California.

No matter what economists say, states are still experiencing fiscal pain. Budget woes are so widespread, in fact, that statehouse reporters from across the nation found themselves comparing notes on how bad it has gotten — and swapping tales of political and policy solutions. 

In California, for instance, the fallout from a massive $38 billion budget gap could even drive that state’s governor, Gray Davis, from office. 

But the news throughout the country is that many states are hemorrhaging red ink. As governors headed into the 2004 fiscal year, according to a preliminary report by the National Conference of State Legislatures, 42 states had an aggregate budget gap of $78.4 billion. NCSL issues annual surveys of state budget and tax actions, and the latest figure includes only those states that had finished budget deliberations and forwarded information earlier in the spring. A final report is expected by the end of the year. 

Meanwhile, there’s plenty of other bad news. Timothy Blake of Moody’s Investors Service outlined for reporters a set of long-range fiscal challenges. Blake, who is part of the state ratings group at that company, is responsible for Illinois and some other states. He noted that factors affecting a state’s rating, meaning its credit worthiness, include the economy, a state’s fiscal condition and its management practices. State deficits and risky strategies, in short, can lead to lower ratings. And, in general, lower credit worthiness can boost the cost of long-term debt.

Yet, as states have gotten more desperate, they have taken more risks. Some are turning to approaches that can be compared to using the family’s credit card to pay for groceries — a risky idea that raises red flags on Wall Street. Fiscal analysts generally want to see governments pay today’s debts with today’s dollars. 

As an example, analysts point to potential problems in deficit bonding. Blake cited Illinois’ $10 billion bond sale, more than $2 billion of which can be called deficit bonds. That’s because the dollars raised by those bonds are earmarked for current state pension obligations, thereby freeing cash to fill some of Illinois’ budget gap. The governor had estimated that gap at $5 billion over two years. Good fiscal practice dictates that governments don’t bond current operations. 

Blake also put this economic downturn into perspective for statehouse reporters, many of whom had covered the economic downturn in the early ’90s. That recession, he said, hit the Northeast hardest, while this recession is hitting the Great Lakes states hardest because manufacturing output is in decline, meaning this recession is not really over for that economic sector. 

During the last recession, Blake said, there were 14 state rating downgrades in five years. This latest recession has prompted 12 downgrades in two years, including Illinois. But, notably, four of those downgrades happened in California. 

In reality, some states have few choices. They’ve been facing fiscal challenges for three years now, and, as experts say, the easy strategies have already been used. According to NCSL, since fiscal year 2001, when early indications of budget problems first surfaced, states have had to find ways to close a cumulative budget gap approaching $200 billion. 

On the expense side of the ledger, Medicaid appropriations have outpaced other key categories of state spending for the third straight year. But Eckl and other experts — though not all — maintain the problem is rooted in anemic revenues. 

Income taxes especially have plummeted in many states, often because of the nosedive in the stock market and the subsequent absence of hefty capital gains that once buttressed state treasuries. Traditionally, states considered the personal income tax a better source of revenue than the sales tax. But, analysts say, states are beginning to weigh whether heavy reliance on the income tax is a sound fiscal strategy.

There are political reasons for this reassessment, as well. Some governors, including Illinois’ Rod Blagojevich, campaigned on no-tax-hike pledges. So these states have tapped special funds and hiked fees to generate additional revenue.

In fact, NCSL says fees are the big story. Billions of dollars have been generated through new or increased fees, some of which Eckl calls pretty creative — Alaska’s studded tire fee, for instance, or Minnesota’s fee for barkeeps who want to stay open an hour longer. 

As in Illinois, more states are dipping into special funds. Some are borrowing against expected allotments under the national settlement with tobacco companies. Some are turning increasingly to short-term borrowing, as Illinois has done. And many, again including Illinois, are pushing to boost their respective federal revenues — just as the feds, facing their own budget problems, are pressuring states to take on more responsibilities with fewer dollars. But this spring, significant fiscal relief came through a windfall for states that was tied to a federal tax cut.

According to NCSL’s report, the states generally are predicting revenue growth in fiscal year 2004. It should be noted, though, that all but one state requires a balanced budget — at least on paper — and optimistic revenue projections help when officials are struggling to balance the books. Over the past three years, states have had to lower revenue projections later in the fiscal year.

The Association of Capitol Reporters and Editors is tentatively scheduled to meet again in South Carolina in November 2004. At that post-election session, reporters are likely to compare notes on how well their states’ budgets fared — and whether other governors have foundered on fiscal crisis. 

But if California, the fifth-largest economy in the world, has gone belly up, that will be no joke for the states. Or the reporters who cover them. 

More information 

Association of Capitol Reporters and Editors(capitolbeat.org) is an organization of journalists who cover the states. 

Council of State Governments (csg.org), an association of legislative and executive elected officials, offers multistate solutions to policy problems. 

National Conference of State Legislatures (ncsl.org) is an organization that serves the nation¹s state lawmakers. 

Stateline.org compiles and reports online news of the states and tracks trends.


Peggy Boyer Long can be reached at Peggyboy@aol.com.

 

Illinois Issues, September 2003

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