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States face big budget gaps, little chance of improvement

Crisis to persist three more years, survey suggests

By Paul Davenport
Associated Press / December 9, 2010

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PHOENIX — Lawmakers have reduced spending for parks, health care for low-income children, and some state-funded medical transplants. Still, the tough times are far from over.

A report released yesterday by the National Conference of State Legislatures said that the fiscal crisis is reshaping the level of services state government can deliver and will probably continue at least another three years for many states.

The report did offer a glimmer of good news: State economies are improving, and so are tax revenues. But modest gains in tax revenue will not be enough to help most state budgets in the next fiscal year.

That means more pain for those who depend on state programs, from schools to public transportation. “It just poses these excruciatingly difficult decisions,’’ said Corina Eckl, director of fiscal programs for the conference.

The deepest economic downturn in 70 years, job losses, and high home foreclosure rates have led to a sharp drop in tax revenue flowing to local and state governments, leaving agencies with spending commitments they can no longer afford.

So far, budget gaps totaling $26.7 billion are anticipated for 15 states, the report said. The other 35 states do not currently project a gap for their budgets, the conference said.

Last time around, states closed a cumulative $83.9 billion deficit. For many, it was their third or fourth year of shortfalls.

States have been able to make up the shortfalls with a combination of federal aid, including stimulus funds; borrowing; selling assets; raiding special funds; and cuts in such services as day-care subsidies and police.

But it is getting harder to find similar resources. That prospect has some legislators, even Republicans, discussing tax increases.

“There’s only so much you can cut before you get to what I call essential services that need to be provided by the state,’’ said state Senator Bill Raggio of Reno, Nev., a Republican who is the longest-serving legislator in state history at 28 years.

Nevada — which leads the nation in unemployment, bankruptcies, and foreclosures — is projected to have a shortfall between $1.1 billion and $3 billion, depending on what level of services lawmakers want the state to provide. The Legislature met in February in a special session to close an $800 million gap, in part, by draining reserve accounts and increasing fees, such as the cost for banks to file foreclosure paperwork with the state.

Illinois has projected a shortfall of more than 30 percent of its general funds, and it is not alone.

Spending restraint has helped Missouri and other states avoid shortfalls in the current fiscal year, according to the report, based on revenue and spending in every state and Puerto Rico.

States projecting shortfalls of 20 percent or greater in the 2012 fiscal year include New Jersey (26 percent) and North Carolina (20.3 percent). The midyear gap in the current Illinois budget tops the list at a projected 47 percent of its general fund.

Illinois carried nearly $6.5 billion in unpaid bills into the fiscal year that began in July. The state’s pension funds, which have nearly $80 billion in unfunded liabilities, are owed at least $3.7 billion this year.

Lawmakers are reluctant to cut spending or services, and the state’s flat income tax rate has not been increased in 20 years.

“It’s going to take cuts in areas that have not traditionally been cut — you can’t do it with just an income tax increase — and then some strategic borrowing,’’ said Representative Frank Mautino, a Democrat.

Arizona has a 9.7 percent shortfall projected in the current fiscal year and a 14.7 percent gap in the next. The state has so far cut around the edges of school funding by suspending aid for maintenance, halving funding for kindergarten, and slashing money to buy textbooks, computers, and other equipment.

The state’s Medicaid program ended funding for some organ transplants through Oct. 1 under a budget cut approved earlier this year. Governor Jan Brewer said the state cannot afford to maintain its current program and its previous services.

Democratic lawmakers called on Brewer to restore funding to the program.

“This ‘Brewercare’ has set up real death panels here in Arizona, and it is outrageous and disgusting,’’ said Representative Anna Tovar, who had bone marrow transplants in 2001 and 2002 to treat leukemia.

In California, the projected shortfall in the current fiscal year and the next is expected to grow to $25.4 billion, nearly 30 percent of the current $86.6 billion general spending plan.

California’s 2009 cash shortage forced the state to issue IOUs, furlough tens of thousands of state workers, and impose temporary tax increases. Service cuts included trimming health care for the poor. The state also raided local government funds.

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