Beyond California: States to Watch

By: - November 10, 2009 12:00 am

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While California’s economic problems take the spotlight, at least nine other states are toiling with hardships nearly as daunting. They share important characteristics with California, but they are not necessarily destined to follow in the Golden State’s footsteps.

Some states highlighted in “Beyond California: States in Fiscal Peril” already have responded aggressively to their budget crisis, although it is too soon to tell whether their actions will put them on solid fiscal footing.

In a nutshell, here are the major challenges facing each of the nine states profiled in detail in this report:



As the economic news grew bleaker and state revenues sank during the past two years, Arizona’s lawmakers relied on one-time fixes to balance its budget instead of making long-term changes. In part, they were hamstrung by voter-imposed spending constraints, a tax structure highly reliant on a growing economy and a series of tax cuts, made in the 1990s, that has limited revenue. At this writing, policy makers still had not decided how to bridge a $1 billion gap in the current fiscal year’s budget.
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For the first time since World War II, Florida’s population is shrinking. This is a disturbing revelation for a state that has built its economy-and structured its state budget-on the assumption that throngs of new residents will move to its sunny shores each year. Lawmakers tried to head off trouble by agreeing in 2009 to raise $2 billion in new revenue, but it already appears that legislators will face a similar-sized budget shortfall next year.
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Illinois entered the nation’s fiscal crisis in a precarious position. Since the last recession earlier this decade, the state piled up huge backlogs of Medicaid bills and borrowed money to pay its pension obligations. Its problems grew worse once the Great Recession hit. The state’s current budget still relies heavily on borrowing and paying bills late. The budget shortfall lawmakers confronted for fiscal year 2010 topped $13.2 billion, among the worst budget gaps in the country.
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Michigan never climbed out of the recession that started in 2001, and matters only became worse during the Great Recession. Two of the Big Three Detroit-based automakers went bankrupt in 2009, sending shockwaves through a state that is on track to lose a quarter of its jobs this decade. The recession accelerated drops in state revenues and has left Michigan’s government trying to deal with today’s problems on a 1960s-sized budget.
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Nevada’s unique gaming-based economy is in jeopardy, as is its state budget that relies on gambling and sales taxes to provide 60 percent of its revenues. Year-over-year revenue has fallen for two consecutive years, a record. But changes to the tax system are difficult because, unlike most states, Nevada has written some of its tax laws into the state constitution. So increasing the sales tax or adding an income tax, for example, would be nearly impossible because it requires voters to amend the constitution.
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New Jersey

New Jersey is playing catch-up after years of fi scal mismanagement and a daunting structural imbalance between what it collects and what it spends. The woes of nearby Wall Street-which supports approximately one third of New Jersey’s economy-only made matters worse. Growing debt payments and perennially underfunded pension systems will make the Garden State’s road to recovery even rougher.
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The downturn has severely affected some of Oregon’s leading industries, such as timber and computer-chip manufacturing, and exposed the state’s reliance on volatile corporate and personal income taxes-the result of voters rejecting a statewide sales tax nine times. State revenues plummeted 19 percent between the first quarter of 2008 and the first quarter of 2009, a reflection of Oregon’s heavy reliance on income taxes. Lawmakers this year approved more than $1 billion in new taxes to make sure the state can pay its bills. But voters in January 2010 will have the final say on $733 million in new income taxes that are part of that package, and the electorate historically rejects tax hikes at the polls.
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Rhode Island

The country’s smallest state has big problems. It was one of the first states to fall into the recession because of the housing crisis and may be one of the last to emerge. Rhode Island consistently ranks near the top of states with the highest unemployment rates, and last year it had the highest home foreclosure rates in all of New England. State government has a poor record of managing its finances, and its economic recovery is hampered by high tax rates, persistent state budget deficits and a lack of high-tech jobs.
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To most, Wisconsin does not seem to have the same problems managing its money as California, its dairy rival. But the recession has hit Wisconsin harder than most state governments, especially when it comes to lost tax revenues and the size of the hole in its budget. On top of that, unemployment is climbing as the state’s largest sector-manufacturing-sputters. Wisconsin’s history of budget shortfalls and pattern of borrowing frequently to cover operating expenses, among other measures, made it poorly positioned to weather the most recent severe economic downturn.
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