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Governors Warned of Rough Fiscal Waters

By Michele McNeil — June 19, 2008 4 min read
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State leaders may have thought this budget year was tough, but fiscal 2009 will be even worse, predicts a new report by the organizations that represent the nation’s governors and their top budget officers.

States’ cash balances—a key sign of fiscal health—are declining, which means states will have a smaller financial cushion as they enter future budget years, according to the report. It was released today by the National Governors Association and the National Association of State Budget Officers, both based in Washington.

The report projects that states, on average, will have a financial cushion of 7.5 percent of total expenditures at the end of fiscal 2009, down from 11.5 percent three years ago.

“The [states’] fiscal situation mirrors the situation currently being experienced by the American consumer,” said Scott D. Pattison, the executive director of the state business officials’ group, at a press conference today. He said that although these tough times aren’t as bad as those following the 9/11 terrorist attacks, “we are worried about how bad it will continue to get.”

It’s not all bad, however. There is a huge disparity—unlike any seen in the last three decades—among states, said Raymond C. Scheppach, the NGA executive director. Some states have been hit hard by the housing market slump, including California, Florida, Arizona, and Nevada. Other states rich in energy and food crops, such as Montana, Wyoming, and North Dakota, are booming.

Governors already appear to have braced for the bad news, the report concludes, having recommended budgets for 2009 that collectively included only a 1 percent increase in spending—the third-lowest rate in 31 years.

The findings echo those of the Denver-based National Conference of State Legislatures, which issued its budget update in April. (“State Fiscal Woes Start to Put Squeeze on K-12 Budgets,” May 7, 2008.)

Bad News for Schools?

Though the 52-page NGA-NASBO report doesn’t focus on education, it’s clear the findings don’t bode well for K-12 schools, which took up the biggest chunk—34.4 percent—of states’ general-fund budgets in fiscal 2007. Even though state leaders typically cut K-12 spending only as a last resort, it’s unclear how many states can continue to weather the economic storm without slashing funds for public schools.

States aren’t likely to start cutting public school funding, or even flat-lining spending growth—at least not yet, Mr. Scheppach said.

“We’re going to see a ratcheting down” from past increases of 3 or 4 percent to 2 percent or less, he said. And the effect will most likely be felt in more modest growth in teachers’ salaries, he added.

Mr. Pattison said K-12 education is the most “sancrosanct” line-item in states’ budgets. He pointed out that even in the post-9/11 economic downturn, most states didn’t have to cut K-12 spending.

Sparing K-12 education means other programs must be cut. Already, during the 2008 budget year, 13 states had to reduce their already-enacted budgets because of sluggish revenue, compared with only three in 2007. That’s still far shy of the 37 states that had to reduce their budgets in 2002 and 2003, during the last economic downturn.

However, the report points out an ominous fact about the recession of the early 2000s: States’ biggest budget cuts came after the national economic downturn ended in late 2001. Most experts agree this latest national economic downturn has not ended, and it’s not clear when it will.

As the economy continues to tumble, states can expect more residents to seek public assistance, such as health-care coverage or food stamps, which will only put more pressure on already stressed budgets and further compete with education for funding. Nearly one-half of governors proposed spending more to expand health insurance to low-income residents in 2009, and six wanted to increase spending on food stamps.

“Unfortunately, when revenue growth declines as a result of a weakened economy, spending pressures for social programs and health care increase,” the report says. As a result, “fiscal 2009 could prove to be more troublesome than fiscal 2008.”

Costs Outpace Revenues

The reason for states’ budget problems are numerous: Rising fuel costs are driving up the cost of doing state business, the slowdown in the real estate market has hit states’ tax revenues hard, and general sales, corporate, and personal income taxes aren’t growing as much as they did during stronger economic times.

Still, states are predicting a 4.4 percent growth in tax collections next budget year—although in many states, that won’t be enough to cover the rising costs associated with providing services such as prisons, roads, and education.

During this year’s budget negotiations around the country, K-12 education has already taken a hit.

In Florida, districts will have about 5 percent less to spend in the 2008-09 school year than they did the year before, because of state budget cuts. (“Fla. Districts Slash Programs, Personnel,” May 14, 2008.)

California, meanwhile, has struggled to close a $17 billion budget deficit for next year. Thousands of teachers across the state faced layoffs before Gov. Arnold Schwarzenegger, a Republican, cobbled together a revised, $101.8 billion budget that will likely spare most of those jobs—at least for now. (Revised California Budget Plan Could Blunt Impact on Schools,” May 21, 2008.)

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