Tuesday, February 12, 2013

State Budget Deficits

State governments, unlike the federal government, have to balance their budgets according to law. A tough task in normal times, but after the Great Recession it became much more difficult for many states as economies around the nation suffered. Here is a list of the state’s entire projected deficit for the fiscal year of 2012.It also orders the states in terms of the projected deficit as a percent of 2011 total spending. For 2012, there are only six states that are not projected to have a budget shortfall: Alaska, Arkansas, Montana, North Dakota, West Virginia and Wyoming. 

The state budget crisis got to such critical levels that a task force was created to examine the problem of fiscal sustainability more closely in six states: California, Illinois, New Jersey, New York, Texas and Virginia. The report found there are six major threats hindering the states abilities to balance their budgets, and fiscal stability. 

(1) Medicaid spending growth- Escalating health care costs and increasing enrollments will cause state Medicaid spending growth (at recent rates) to surpass revenue growth by a considerable margin, at least $22 billion annually within five years.

(2) Federal deficit reductions- As the Federal government tries to remedy its own budget crisis, fewer government dollars in terms of grants or other federal spending might decrease, putting states in a fiscally unstable situation. Federal grants accounted for 32 percent of state’s revenues in 2009. 

(3) Underfunded retirement promises- Pension funds for state and local government workers are underfunded by $1 trillion dollars (or up to $3 trillion if more conservative investment assumptions are used. Health care liabilities are also underfunded by over $1 trillion dollars across the nation. 

(4) Decreasing tax bases and Volatile tax revenues- Income taxes have become increasingly volatile, especially since the economic crisis. Sales tax bases are eroding due to untaxed transactions; gasoline taxes are also eroding causing less money for transportation infrastructure.

(5) Local Government fiscal stress- The weak economy and reductions in intergovernmental transfers have put a lot of pressure on local governments. As a result spending on education, law enforcement and welfare programs have decreased. This threatens the overall economic and social status of the states. 

(6) State budget laws and practices- Lack of transparency and reporting have made it difficult for the public to gauge the critical nature of the budget situation. Using borrowed funds or other temporary ‘one-shot’ measures to balance the budget are not uncommon. These practices make fiscal stability extremely difficult. 

A summary of the main report may be found here. Links to the individual state reports and the full main report may be found in the previous link.

State budget crises have led to some serious consequences for the states’ residents. At least 46 states have decreased services provided, including some to the most vulnerable families, while more than 30 states have raised taxes to some degree and some quite significantly. During the recent economic downturn, when residents expected and needed services and benefits from states, they were unable to sufficiently provide them. Raising taxes to help balance the budget also puts the economic recovery at risk. 

Many states have to make some difficult decisions when trying to balance the annual budgets. In Texas, the state government cut $5.4 billion dollars in spending on education statewide. Part of the cuts involve having to lay off 25,000 public education workers, including 11,000 teachers. These cuts are occurring while student enrollment is increasing, by more than 80,000 per year. Texas is facing a two-year budget shortfall of $27 billion.
California last election passed new regulations raising the income tax rates for the wealthy, 10.3% for those earning over $250,000 and 13.3% for those earning over $1 million. The increases are expected to lower the budget shortfall, a projected $16 billion in 2012, down to $1.9 billion by the end of summer in 2013. But the tax hikes might cause an exodus of the wealthy from the state, who do not wish to pay the higher tax. The wealthy already feel they carry enough of the burden. The top 2 percent of earners, those over $450,000, pay 46 percent of the state’s taxes. Those earning over $1 million account for 25 percent of the entire state’s taxes.
This link shows all 50 states, estimated budget shortfalls, tax change percentages, and cuts to various programs. Minnesota from Jan 2010-March 2011: personal income tax increased 17%, corporate income tax increased 30.6%, and sales taxes increased 3.6%. 

The states unlike the Federal government cannot borrow large sums of money to balance their budget. This creates a difficult situation, especially after an economic downturn, where states scramble to find revenues or cut spending in order to avoid a shortfall. Citizens want states to have balanced budgets, but they might not always agree with the path taken to get to a balanced budget especially if services are cut or taxes are raised. Today many states are put in the seemingly impossible position of determining how to reduce deficits and without cutting too many services to residents or raising taxes too high.

1 comment:

  1. Nice discussions, and very helpful links to external sources.

    A question about the paragraph starting with "This link shows all 50 states....": It is interesting to see the increased tax collection in Minnesota in FY2011. How much of that was driven by tax rate changes instead of economic fluctuation?