Plunging Revenue Causes New Problems

By: - July 9, 2009 12:00 am

A wave of states that had balanced budgets earlier this year are facing new or widening shortfalls as May and June tax revenue collections are declining more than expected.

In recent days, officials in Colorado, Hawaii, Iowa, Kansas, Maryland, Massachusetts, New York, Oklahoma and Virginia have reported that declines in sales, income and business tax receipts will knock their budgets out of balance. Georgia and Utah officials are awaiting new revenue estimates any day, but say they could be dealing with budget gaps.

More states could have the same problem as the summer goes on, specialists say. May and June are the last two months of the 2009 fiscal year for most states, so officials will have to cover those new gaps as well as the shortfalls they are already projecting for the 2010 fiscal year that began July 1. Governors can do that through executive orders or legislatures can take action when they next meet. The solution  usually is some combination of spending cuts, tax increases or dipping into reserves.

“I think there will be other states that see gaps in fiscal 2010,” said Elizabeth McNichol, a senior fellow who is tracking state budget issues for the Center on Budget and Policy Priorities . The Washington, D.C.-based think tank advocates policies benefitting low- and moderate-income people.

The revenue problem is separate from the issue of the six states that failed to enact spending plans by the July 1 start of the fiscal year. One of those states – Arizona moved closer to an agreement as Republican Gov. Jan Brewer was planning to sign a $10 billion budget deal Wednesday (July 8) that maintained her goal of avoiding cuts to public education. But the budget still has a $2 billion gap that will need to be resolved in the next few weeks.

The other states without spending plans are Connecticut, Illinois, North Carolina, Ohio and Pennsylvania. Lawmakers in a seventh state, California, approved a spending plan earlier in the year but it has since unraveled because of sagging revenues. The gap is $26 billion.

The spreading budget crisis shines a light on the practice of estimating revenues, which during normal years attracts little attention, especially if a state is bringing in more money than forecast. During a recession, when tax receipts drop as people stop spending and workers lose their jobs, the revenue projections are crucial to keeping states’ budgets in balance. Month by month, the current recession has turned out to be worse than most economists thought it would be, which has made it difficult for revenue officials to make accurate projections.

“It’s hard to take them to task because they are relying on economic forecasts that have since been downgraded,” McNichol said. “They’re trying to hit a moving target.”

Massachusetts and Hawaii officials were the latest states to learn about the dip in June revenue. In Massachusetts, officials were told that revenue dropped about $260 million last month compared to a year ago, according to preliminary estimates.  If that number holds up, the state will end the 2009 fiscal year with a $180 million gap.

In Hawaii, Republican Gov. Linda Lingle on Tuesday (July 7) raised the estimate of the two-year state budget shortfall from $730 million to $823 million after learning that revenue collections fell even lower than officials had projected in late May. She had hoped to cover most of the gap by furloughing as many as 47,600 state workers, but a judge blocked the plan.

New York state controller Thomas DiNapoli, peeking at preliminary June revenue estimates, said Sunday (July 5) the state was headed for a “budget free fall” if the Legislature and Gov. David Paterson (D) do not slash the budget this summer. Revenues in April and May were 36 percent lower than a year ago, and June receipts will continue the pattern, he said. The Legislature approved the $132 billion budget in March; New York’s budget year starts April 1.

“It’s not fair to say we’re quite at the same point as California, but we certainly have a budget that appears not to be holding together,” DiNapoli told the New York Daily News . California officials are issuing IOUs to pay their bills because of a cash crisis brought on by their  budget gap.

Maryland lawmakers approved a balanced spending plan for 2010 in April but recently learned last year’s budget is out of whack by as much as $300 million because of less than expected tax receipts in May. Gov. Martin O’Malley (D), who has said he would propose $200 million in cuts by the end of July, called the midyear budget cuts “a limbo dance” that every state is dancing.

Because of falling revenue in May and June, Kansas Gov. Mark Parkinson (D) and legislative leaders now are confronting a $160 million deficit, only a few months after approving a balanced budget in April. The leaders also agreed July 6 to borrow $700 million from reserves to pay bills and issue income tax refunds. Parkinson explained the problem many states are having in a July 2 web address.

“The legislature left in April, and we all felt pretty good about the work that we had accomplished. Unfortunately then, we got the May revenue numbers,” he said. “It looks like in June, we’ll receive less money than we thought we would, so we’re going to have to make cuts that are even beyond the $100 million cuts that we learned about in May.”

New revenue forecasts in Colorado show the state ending the 2009 fiscal year on June 30 with a $249 million shortfall and beginning 2010 with another $135 million gap, or $384 million overall. Democratic Gov. Bill Ritter has ordered state agencies to slash 10 percent from their budgets.

In Oklahoma, state agency heads will be forced to make cuts of 1.4 percent in last year’s budget after May tax collections were less than estimated. The Legislature already cut spending 7 percent for the budget year that started July 1.

Iowa finished the 2009 budget year as much as $161 million in the red, prompting some Republican lawmakers to urge Democratic Gov. Chet Culver to call a special session to reach into reserves. Culver said the special session is not necessary but added that future cuts are possible.

Washington state officials said recently that increased demand for health services – typical in a recession – has cost state government about $250 million more than projected. The state already has a $200 million budget gap because of falling tax collections. The $450 million shortfall will have to be made up. Gov. Chris Gregoire has ordered more spending cuts but the Legislature would have to approve dipping into reserve funds. The next session is in January.

Virginia’s budget is off by $300 million, Gov. Tim Kaine (D) recently announced, which will be made up from federal stimulus funds, spending cuts and other funds.

An even bigger worry for states is the budget year that begins July 1, 2011. As revenue continues falling and officials cut the 2009 and 2010 budgets, states will have fewer dollars to spend in 2011. “The revenue base will be lower to start with, so you won’t have enough revenue to balance spending,” McNichol said.

A University of Denver report released Tuesday (July 7) put a finer point on the 2011 problem. The report said spending for schools, prisons and Medicaid will keep growing in 2011 in Colorado.

“I do think fiscal year 2011 is a cliff,” says Charles Brown, director of the university’s Center for Colorado’s Economic Future . “That seems to be the time when the state will face a terrific hole to fill.”

See Related Stories:
Financial crisis torments states (7/1/2009)
Tracking the recession: Budget deadline looms (6/29/2009)
Reports: State income levels plunge (6/19/2009)
Recession pounds states’ budgets (6/15/2009)
Reports: Bleak state budgets through 2011 (6/4/2009)
State budget gaps top $200 billion; fees, tax hikes in the works (4/24/2009)
Report: Sales tax collections hit 50-year-low (4/14/2009)
Stimulus tax breaks threaten state revenues (4/7/2009)
Report: State tax revenue takes a dive (3/12/2009)

Contact Stephen C. Fehr at [email protected] .

Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our web site. Please see our republishing guidelines for use of photos and graphics.

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.