THE BLOG
07/20/2009 05:12 am ET | Updated May 25, 2011

State Budgets: Times Are Tough All Over

You know the economy's in the gutter when Nevada's looking to tax brothels.

California could legalize pot and tax it and New York might tax soft drinks and candy. These are just some of the more creative ideas states are considering to balance their budgets, according to research by the National Conference of State Legislatures.

It's a Herculean task and not because states are spendthrifts. The reality is that state revenues have fallen prey to the global recession. But just how bad is it? Well, the usually sober NCSL concludes the summary of its 50-page report with, "Readers beware: the horror story continues!"

Forty-four states faced deficits for fiscal 2009 for a total of $102.7 billion. And 43 states are dealing with holes for fiscal 2010 totaling a staggering $121.2 billion. To put this in perspective, NCSL had to redraw the scale of the chart to include that kind of whopping debt.

In sheer dollars, California's fiscal 2010 budget gap dwarfs all others with $24.8 billion. New York is facing a $17.7 billion hole. Illinois has $7.3 billion, New Jersey $7.2 billion and Florida $6 billion. But looking at the General Fund -- the discretionary spending for most states -- is useful to better compare states of varying sizes.

There's a 32-percent crack in New York's and Nevada's General Fund budgets - hence the imaginative sin tax ideas. Alaska's gap could be 30 percent of its general fund, NCSL reports. Arizona is looking at 28 percent; Florida at 27 percent; California at 22 percent; Connecticut, Vermont and Illinois at 21 percent; and New Jersey at 20 percent. That's why so many states have turned to Recovery Act dollars to fill in their budget gaps -- although that usually isn't enough.

"Had the money not come in, the situation could be much worse," says Corina Eckl, director of NCSL's Fiscal Affairs Program. "The concern is what states will be left with in 2011 if the economy doesn't turn around."

Michigan has the worst economy in the nation, with 14.1 percent unemployment for May and two of its biggest employers, General Motors and Chrysler, in bankruptcy. Its General Fund gap is a little more manageable at 10 percent -- just under $1 billion for now. However, Michigan House Fiscal Agency Director Mitch Bean notes that other states have more options. The Mitten State has had to slash budgets since 2001 when the domestic auto industry and manufacturing started to nosedive.

"We've already had to comb through the budget for places to cut," he says. "We've been doing this for so long, restricting the growth of budgets for years and we don't have any other fund surplus. I don't know of any other state that's been in the state we've been in."

For fiscal 2010, NCSL notes the outlook for 20 states is "pessimistic." For 29 states, the outlook is "concerned." North Dakota is the only state with a "stable" designation and no state's outlook is "optimistic."

So far, 16 states have resorted to tax hikes and 17 others are considering them, reports the Center on Budget and Policy Priorities. This is what happens when states can't pay their bills. Despite all the hand-wringing of how cataclysmically monumental Michigan's income and business tax increases were in 2007, in hindsight, we look like we were ahead of the curve.

States are looking at deep cuts, too, according to NCSL.. Arizona has nixed a welfare program for people waiting for Social Security benefits. Colorado has proposed cutting services for the mentally ill and reducing doctor and hospital Medicaid reimbursement. Idaho is considering a 7.5 percent cut to the Department of Public Health and Welfare. Oregon may end its prescription drug plan, in-home care for 6,500 elderly people and reducing state aid for nursing home care for 4,200 people. Tennessee could drop 90,000 from Medicaid.

Layoffs have swept across states, as well. Virginia has slashed 1,500 state workers and Arizona has axed 1,000. Louisiana could be looking at 1,400 layoffs, Missouri at 1,300, New York at 8,900, North Carolina at 1,400, Pennsylvania at 2,995 and Washington at 7,000.

Furloughs are common. Michigan employees will be furloughed up to six days this fiscal year. In California, 238,000 state workers are furloughed two days each month. Colorado could furlough workers five to 10 days in FY 2010 and Alabama could furlough some employees up to 24 days. Maryland is looking at five days, Illinois at four days, New Hampshire at 12 days, New Jersey at 12 days and Utah at 11 days.

Many states have cut education, but backfilled with stimulus cash. But some are considering deeper cuts. Michigan wiped out more than 95 percent of its early childhood funding. California could cut $7.3 billion from its K-12 budget and Iowa is looking at slicing 8 percent. Nevada could eliminate $700 million.