Financial Crisis Torments States

By: - July 1, 2009 12:00 am

Source: reporting

(Updated 5:25 p.m. EDT, July 1, 2009)

Four states closed billions of dollars in budget shortfalls and approved spending plans in the last 24 hours, but legislatures and governors in six states were still far apart on their budgets as the fiscal year began Wednesday (July 1).

Indiana, Mississippi and Delaware averted disruptions in government services by approving budgets in time for the new fiscal year.

Arizona also will escape a shutdown- for now. The Republican-controlled Legislature sent Gov. Jan Brewer (R) a final-hour .4 billion budget plan before adjourning Wednesday. Hours later, she ordered lawmakers back to Phoenix on Monday (July 6), saying they needed to fix what she called a “fatally flawed” budget. The spending plan did not contain a temporary sales tax increase proposal the governor had sought to put on the November ballot to avoid painful spending cuts.

“The legislative budget ignores my consistently expressed goals and instead incorporates devastating cuts to education, public safety, and our state’s most vital health services for the frail,” Brewer said in a statement.

States without budgets on the first day of the new fiscal year are Connecticut, Illinois, Pennsylvania, North Carolina and Ohio. California lawmakers approved a budget in February but falling revenue has knocked it out of  balance by billion.

California officials said they will be forced to issue IOUs because they will not have the money to pay all of the state’s bills. Pennsylvania and Illinois officials say they will keep essential operations going, but a protracted stalemate could begin affecting day-to-day services in those states in a few weeks.

Shutdowns were not a threat in Connecticut, North Carolina and Ohio, even without a new budget plan in time, because those states have provisions to temporarily spend without a budget.

Ohio lawmakers approved the first temporary budget in 18 years June 30, keeping spending going for at least a week as they try to reach a compromise. Connecticut Gov. M. Jodi Rell (R) signed an executive order to keep government running without an approved budget. North Carolina lawmakers approved a stopgap spending plan while they continue budget negotiations.

Indiana had been preparing for a partial shutdown if a budget plan had not been in place by the July 1 deadline, but  lawmakers sent a .8 billion spending plan to Gov. Mitch Daniels (R), who signed it late Tuesday. Indiana had not missed a budget deadline since 1887.

At 4:33 a.m. EDT Wednesday, Delaware Gov. Jack Markell (D) signed the billion budget the Legislature sent him, wiping out an million shortfall. In Mississippi, lawmakers ended a stalemate with Gov. Haley Barbour (R) over a Medicaid reauthorization plan, and Barbour is expected to sign that and other spending bills that will keep government running.

The last time so many states blew the deadline was two years ago, when six states could not agree on a budget by July 1. The widening of the problem this year reflects a steady drop in tax revenue because of the recession, which has forced 48 states nationwide to close billion of budget gaps.

Even a partial shutdown of state services could have an acute impact on residents and state workers, especially if it dragged on for weeks. Thousands of state employees could be furloughed. Road and bridge repairs would cease. Drivers couldn’t get or renew licenses. Highway welcome centers and state parks would be shuttered just as the Fourth of July weekend approaches.

If forced to shut down services, Arizona won’t investigate reports of child abuse or help domestic violence victims, among other things. Pennsylvania employees would stop getting paychecks beginning July 17; the state employee credit union has offered them 60-day, no-interest loans if that occurs.

Illinois officials say they probably can get by for a few more weeks without making drastic cuts in services. Gov. Pat Quinn (D), who addressed a rare joint session of the Legislature on Tuesday, has said that unless lawmakers pass a tax increase by July 1, he will trim social service programs that help the needy.

Pennsylvania Gov. Ed Rendell (D) told reporters it could take up to two months to reach a budget agreement, with government workers staying on the job but with no pay and services affected in a few weeks. Two years ago, Rendell ordered 24,000 state employees to go home after the Legislature failed to send him a budget.

California Controller John Chiang said he would begin issuing IOUs Thursday (July 2) if the Legislature and Gov. Arnold Schwarzenegger (R) cannot agree on a budget. Payment delays would affect income and corporate tax refunds; payments to private contractors, state vendors and local governments for social services; and state operations, including daily pay for legislators.

“Unfortunately, the state’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses,” Chiang said. The state needs an additional .8 billion to pay its bills; by September the figure will grow to .5 billion. Resolving the budget crisis would resolve the problem, he said.

States that fail to balance their budgets on time deal with the problem differently.

According to a 2008 analysis by the National Conference of State Legislatures (NCSL), 11 states have provisions to pass a temporary budget to keep money flowing to agencies and employees until the legislature approves a final budget, as Illinois did for a month in 2007. This is similar to the U.S. Congress passing a continuing resolution, a frequently used stopgap measure. In 13 states, the state constitution or court rulings say that government can stay open, with uninterrupted payments at the previous year’s levels.

NCSL said 22 states face government shutdowns if there is no approved budget or if lawmakers fail to approve a temporary spending bill.

Eleven states don’t know what would happen if the budget were not enacted, NCSL said. State law does not deal with the problem because it has never come up.

A governor’s powers during a budget breakdown are not always clear-cut, as Mississippi discovered.

Before Mississippi resolved its budget problem Tuesday, Barbour (R) had said he had the authority to keep government operating past July 1 if there was no budget. But Attorney General Jim Hood (D) said in a June 26 opinion the governor “has no authority to unilaterally declare an emergency and seek to keep all government offices open by executive order” because the Legislature has the sole power to appropriate state money.

Even in states that have approved budgets, July 1 is a day of reckoning because many of the budget cuts and tax and fee increases enacted by legislatures go into effect. In Nevada, for example, a record billion in tax increases begin; Las Vegas now has an 8.1 percent sales tax. Twenty-five states boosted taxes this year, according to the Center on Budget and Policy Priorities , a Washington, D.C., think tank.

Hardly a week goes by without another state budget problem surfacing. On Tuesday, Kansas Gov. Mark Parkinson (D) said that since the Legislature approved a pared-down state budget earlier this year, tax revenue has fallen so sharply in May and June that another million in cuts will be needed as the fiscal year begins.

Without the federal economic stimulus package, state budgets would be even more out of whack. Stimulus money has closed about 40 percent of state budget shortfalls, according to the Center on Budget and Policy Priorities.

The late-hour budget-fixing special sessions are costing taxpayers. Mississippi’s  sessions cost taxpayers about ,000 the first day and ,000 a day after that.

Perhaps the most notorious government shutdown occurred in 1995 when President Clinton and Republican congressional leaders failed to reach agreement on the federal budget and were forced to furlough thousands of federal employees a week before Christmas. The closure had a broad impact on public health, law enforcement, parks, museums, monuments, visa and passports, veterans and federal contractors. It also caused public confidence in Congress to plummet.

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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.