Published Online: July 6, 2009

New Budget Year Brings More Turmoil in States

With its IOUs and plans to close state offices three days a month, California gets all the attention as lawmakers fight to write a budget set off balance by a $26.3 billion deficit.

But the dozens of states that made spending cuts, tapped into reserves or relied on federal stimulus funds to patch together budgets that took effect this past week are hardly free from worry. Many of those spending plans are based on tax revenue projections that have been wrong throughout the recession — and may be unreliable again.

More miscalculations could bring a variety of consequences: deeper cuts to services such as health care and education; layoffs and furloughs of state employees; renewed consideration of tax and fee increases.

"All of these states are going to have to readjust on the fly, because they've started budgets this year that were built on unrealistic expectations, and the revenue just isn't there," said Mark Marchand, a spokesman for the Rockefeller Institute on Government at the State University of New York in Albany.

With the new fiscal year entering its first full week, budget turmoil continued in several states.

Uncertainty in Pennsylvania

In Pennsylvania, state government began July mired in a partisan budget standoff, but its 500 school districts did not have the luxury of waiting out lawmakers — even though they don't know how much state support they will receive this year.

Districts had to guess whether what finally passes will be closer to what was proposed in a budget bill passed by Senate Republicans, or Democratic Gov. Ed Rendell's budget, which calls for $418 million more in basic education subsidies.

Some went with the Senate GOP numbers, some Rendell's, and others made their own estimates. Once a state budget passes they will be able to adjust their spending, but not the all-important local property tax rates they have established for 2009-10.

"In most years you can have a reasonable assurance that at least you're in the ballpark," Jay Himes, executive director of the Pennsylvania Association of School Business Officials, said Thursday. "This year, you've got a $418 million disparity, and that's a very uncomfortable position."

Districts were asked to send their budgets to the Senate Education Committee, and the 150 or so districts that have done so already are all over the map, said Aaron Shenck, a Republican committee aide.

"It's been disappointing that many districts have chosen the higher end — the governor's numbers — and even worse, some have gone above the governor's numbers," he said.

If the state budget is not resolved by Aug. 27, when a key payment is due to school districts, it could cause significant problems, particularly for the poorer districts that rely heavily on state support. Himes said if that payment is missed, cash-strapped districts will have to issue tax-anticipation notes or find other sources of short-term loans.

"We believe the deadline was on June 30th," when the state's fiscal year ended, said Rendell spokesman Chuck Ardo. "And if they have concerns about missing payments, they should contact their local legislator."

The House and Senate adjourned for the holiday weekend July 2, and high-level budget talks were set to resume today.

Budget Cuts in Kansas

In Kansas, Gov. Mark Parkinson imposed another round of spending cuts on July 2 to keep his state’s budget balanced, trimming aid to public schools and higher education funding.

A few of the $160 million in adjustments announced by the Democratic governor will require approval from the Republican-controlled legislature when it reconvenes in January. But most — including education reductions — take effect immediately under a state law that allows the governor to make cuts to head off a budget shortfall.

Some prominent Republican lawmakers questioned whether Parkinson went far enough, but one GOP leader described the governor's actions as prudent.

A deficit loomed on the second day of the state's 2010 fiscal year because tax collections for the just-ended fiscal year were $126 million short of expectations. The state already sought to cope by delaying tax refunds and payments to school districts from June into July.

But paying the delayed bills — and others due in coming weeks — also will require internal borrowing. Parkinson plans to ask legislative leaders Monday for permission to transfer $700 million from various funds into the state's main bank account to forestall cash crunches in coming months.

He didn't rule out the possibility that the state's revenues will continue to fall below expectations, requiring even more budget cuts — or even consideration of tax increases next year.

"My hope and my optimism is that our revenue numbers will stabilize," Parkinson said at a news conference. "If the revenue numbers deteriorate further than what we anticipate, everything's on the table."

Special Session in Arizona

In Arizona, Republican legislative leaders have strongly criticized Gov. Jan Brewer for her handling of the state's budget crisis, with Senate President Bob Burns saying the former secretary of state seems to be in over her head as governor.

"It appears the governor is having problems managing the level of responsibility to which she has been elevated," Burns, R-Peoria, said last Thursday of his fellow Republican. "I hope she takes the opportunity during the weekend ... to reassess her priorities and get back in touch with the qualities that embodied the reliable and reasonable person I used to know."

Burns' comments capped a statement criticizing Brewer's July 1 vetoes of key elements of a budget proposal that she negotiated with Burns and House Speaker Kirk Adams, R-Mesa.

"To completely unravel a long and sometimes extremely difficult compromise makes absolutely no sense," Burns said. He also panned Brewer for calling a short-notice special session.

Brewer responded by calling Burns' comments "regrettable and terribly unproductive."

On July 1, Brewer signed the budget's main spending bill but line-item vetoed numerous parts of it — including the $3.2 billion appropriated for K-12 schools — because lawmakers didn't put her proposed sales-tax increase to a public vote.

The sales-tax referral was part of the budget package that Brewer negotiated with Republican legislative leaders, but it drew strong opposition from many lawmakers from both parties.

While rejecting key parts of the spending bill and killing most of its companion bills, Brewer called lawmakers into special session starting today to resume budget work.

Revenue Forecasts Way Off

Around the nation, revenues during the just-concluded fiscal year fell below the projections used to craft budgets in at least 38 states, were roughly on target in 10 states, and ahead in just two, according to a survey released last month by the National Association of State Budget Officers and the National Governors Association.

Nebraska's tax revenues improved in May after falling far short of projections in April, but if revenues don't continue improving, state lawmakers could be called into a special session to change the two-year budget.

In May, Nebraska's tax revenues came in about 4 percent higher than predicted, which helped quiet concerns raised after April's revenue fell nearly 10 percent short of projections.

Most states weren't just barely missing their revenue projections, they whiffed by large margins.

Missouri, for example, projected 3.4 revenue growth for its 2009 budget. Instead, revenues fell by 6.9 percent compared to 2008 — a more than 10 percentage point swing that budget director Linda Luebbering termed "the worst in over a generation."

The state's problems are compounding. The 2010 budget passed by Missouri lawmakers projects that tax revenues will rebound modestly. Instead, Luebbering said, tax revenues now are likely to fall even further.

Officials in some states are facing a backlash for actions taken as a result of the missed revenue projections.

In Oregon, where personal income tax collections were preliminarily down 15 percent from projections for 2009, the recently adjourned legislature approved a two-year budget dependent upon $733 million in tax increases to avoid cuts to schools and other state services. Anti-tax activists and business groups are planning a petition drive to put the tax hikes to a vote of the people.

After a state council lowered Hawaii's revenue projections for the next two fiscal years, Gov. Linda Lingle ordered state employees to take three unpaid days off each month. Thousands of state employees rallied against the plan at the Capitol, labor unions sued and a state judge blocked the furloughs from taking effect as scheduled on Monday.

In Ohio, some House Republicans have called for the resignation of the Democratic governor's budget director for issuing revenue forecasts that have missed the mark.

But some economists say circumstances are more to blame than human error for the epidemic of missed revenue projections.

State forecasts often rely heavily on national models, which also have been wrong, said Wilbur Maki, a professor emeritus in the Department of Applied Economics at the University of Minnesota who served as state economist in the early 1980s. The depth of the recession and its effect on financial institutions and housing markets also have made it difficult to compare to other downturns, he said

"This recession is especially troublesome," Maki said, "so there is very little immediate past experience that would help to make the forecast."

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