Revenue Drops, Budget Gaps and Expensive Promises

By: - February 11, 2010 12:00 am

Whither California?

California struggled last year with a deficit bigger than most states’ entire budgets, issued IOUs and had some of the country’s highest unemployment and foreclosure rates. How bad could things get? Follow these indicators:

  • Budget gaps: A $60 billion deficit was closed in 2009. The state is short a projected $20.7 billion in 2010. Shortfalls of almost $20 billion a year are predicted through 2014.
  • Revenue: Temporary increases in income tax withholding, the sales tax and vehicle license fees are set to expire in 2011. More than 80 percent of general fund revenue comes from taxes on personal income and sales.
  • Tax reform: Governor Arnold Schwarzenegger (R) wants action on a panel’s recommendation to abolish sales and corporate taxes, reduce the personal income tax and instead create a business net-receipts tax that would apply to both goods and services.
  • 2010 ballot measures: In the works are citizen-initiated measures to repeal a constitutional requirement that two-thirds of the legislature approve budgets and tax increases; impose new taxes on the wealthy; and hold a constitutional convention.
  • Real estate: Property taxes could decrease for the first time in decades; that is good news for homeowners but devastating to local governments.

Embattled states struggle to hold on

California is not the only state with serious financial troubles that bears watching in 2010 and beyond. Many states are experiencing similar problems that have worsened during the recession.

In November, the Pew Center on the States issued “Beyond California: States in Fiscal Peril,” a report profiling nine other troubled states, based on data as of July 31, 2009. Those states are Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

Other states also have been hit hard by the recession and will face a tough year of slumping revenue and budget shortfalls. Keep an eye on Colorado, Connecticut, Georgia, Hawaii, Kentucky, Massachusetts, Mississippi, New York and Washington.

Mineral-rich states spared the worst — for now

Call these the “Lucky Few”-states that have weathered the recession better than most: Alaska, Montana, Nebraska, North Dakota, Texas and Wyoming. Except for Nebraska, all of these states are rich in minerals. Nebraska, meanwhile, benefits from low unemployment, rising farm income and conservative government fiscal policies.

It would be a mistake to conclude these states are somehow prospering. All except North Dakota have slashed spending. Wyoming Governor Dave Freudenthal (D), citing a drop-off in energy revenue, proposed deep cuts in transportation and local government funding as part of a two-year budget for 2011-12. Montana’s chief revenue forecaster said it will take five years for the state to return to the $2 billion in revenue raised in 2008.

Even oil-rich North Dakota did not escape the recession; unemployment benefit payments more than doubled in 2009.

Costs escalate for state employee retirement benefits

Nearly 20 states are examining ways to bring down one of the fastest-growing costs of state government: retirement benefits for public employees. Three of them-Louisiana, Massachusetts and North Carolina-serve as barometers of change.

Louisiana is considering scrapping its current system of guaranteed pension payouts for one similar to 401(k) plans based on defined contributions, common in the private sector. Massachusetts is weighing reduced benefits for newly hired employees, and North Carolina has a commission studying how to design a cheaper pension system for future state employees.

In the recession, state and local government employee pension plans lost a median of 25 percent in value in 2008. The plans are bouncing back, along with the rest of the stock market-but most states are not fully paying their annual bills for long-term benefits.

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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.