Tracking the Recession: Budget Deadline Looms

By: - June 29, 2009 12:00 am

Nearing the Wednesday (July 1) start of a new fiscal year, several states still are struggling to cover substantial budget gaps that will leave governors and legislators no choice but to cut spending and or raise taxes and fees.

If legislatures don’t approve budgets on time, some states could be forced to shut down all but essential government services. Mississippi Attorney General Jim Hood (D) is weighing a court order to maintain key services after July 1 if lawmakers have not voted on a budget agreement by then.

As of Sunday (June 28), governors had not signed, or lawmakers still had not approved, spending plans in Arizona, California, Colorado, Connecticut, Delaware, Illinois, Indiana, Mississippi, North Carolina, Ohio, Oregon and Pennsylvania. The Kentucky, New Jersey, Louisiana, Massachusetts, New Hampshire, Rhode Island and Wisconsin legislatures approved budgets in recent days and are awaiting action by the governors.

One reason for the budget stampede to the deadline is the difficulty in accurately pinpointing the drop in state tax revenue. Throughout the year, state economists and revenue specialists have made their best estimates of tax revenue, only to see those numbers change significantly as the economy worsened. Lawmakers have had to adjust budgets accordingly, and it hasn’t been easy.

Colorado lawmakers, for example, found out June 22 that sales tax revenue fell far below projections, leaving them with a million shortfall in the budget year that starts Wednesday. “It will mean making even more difficult choices,” Colorado Gov. Bill Ritter (D) said in a statement.

The last-minute race to complete difficult budgets during a recession has produced more than the usual tension between governors and lawmakers, especially those of the same political party.

Illinois Gov. Patrick Quinn (D) is battling Republicans – and Democrats – over his plan to raise income taxes to balance the budget. Oregon Gov. Ted Kulongoski (D) vetoed two education spending bills backed by his own party, which controls the House and Senate. Arizona Gov. Jan Brewer (R) took the GOP-controlled Legislature to court over their disagreement on how to close a billion budget gap, though the justices declined to intervene.

Some governors are using their bully pulpit to prod lawmakers into action. First year North Carolina Gov. Beverly Perdue (D) has been traveling across the state to generate support for a proposed .5 billion tax increase to avoid cuts in education. Indiana Gov. Mitch Daniels (R) took a five-city road trip last week to build statewide backing for a budget balancing plan offered by Senate Republicans instead of a tax increase proposed by the Democrat-controlled House.

At least one governor is abandoning long held views in an effort to persuade lawmakers to approve a budget, while another governor is firmly clinging on to past positions. Ohio Gov. Ted Strickland (D) reversed his opposition to allowing thousands of slot machines at the state’s racetracks as the state tries to cover a .2 billion gap over two years. Connecticut Gov. M. Jodi Rell (R) has said consistently this spring she opposes a tax increase, but lawmakers are sending her a budget plan that calls for .8 billion in tax increases over the next two years.

“There’s no question that when the choices are really hard, the political tension rises and it’s hard to get the budget completed in quite a few states as the July 1st deadline approaches,” said Scott Pattison, executive director of the National Association of State Budget Officers .

States vary tremendously, he said, as to what occurs if there is no spending plan after July 1. Some, like Virginia, have never had that problem so they don’t have a plan. Others, like Kentucky, have failed in the past to meet the deadline but made it up as they went along – the governor ran government by executive order. Several states, Pattison said, have some type of provisions for operating beyond July 1 but few do so in the way Congress does by passing a resolution continuing government operations as if nothing had occurred.

“Those examining the financial management of states – namely bond rating agencies – don’t see going beyond July 1 as a positive thing,” Pattison said.

California, which has the lowest bond rating of any state, has the largest budget gap to make up by Wednesday: billion.

The four states that start their budget year before or later than July 1 are New York, Texas, Alabama and Michigan. Of those, only Michigan hasn’t enacted a budget. Lawmakers are trying to approve the general outlines of their budget before taking a Fourth of July recess. Michigan’s government shut down for about four hours on Oct. 1, 2007 when Gov. Jennifer Granholm (D) and the Legislature failed to approve a budget before the deadline.

Some state officials also are dealing with balancing the current year budget. In recent months, legislatures in 42 states had to go back into fiscal 2009 budgets and cut them because of greater-than-expected declines in tax revenue, according to the annual fiscal survey of the National Governors Association and National Association of State Budget Officers.

Until all of the budget numbers are in, officials won’t know exactly how much spending will drop in fiscal 2010 compared to 2009. But according to the governors’ recommended budgets submitted earlier in the year, general fund spending dropped 2.5 percent, the largest decline since the National Governors Association and National Association of State Budget Officers began keeping track of state spending in 1979.

The spending cuts would have been worse without the billion federal economic stimulus package. If states take longer to recover from the recession than the nation as a whole, as is usually the case, governors and lawmakers may press the Obama administration for a second stimulus. Congress separately is expected to approve a new six-year transportation plan, probably next year, which would have the effect of being a second stimulus plan since it could be more than billion.

The next two budget years are also likely to be difficult, analysts say. The Nelson A. Rockefeller Institute of Government said June 18 that personal income taxes fell 26 percent in the first four months of the year, compared to 2008, which is further evidence that state legislators will be grappling with budget holes for years to come.

“States will have to continue looking at spending cuts, using rainy day funds and possible tax and fee increases in order to ensure balanced budgets,” the governors association said in its latest State Economic Review.

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.