State Responses to Tight Fiscal Conditions - Embargoed Press Release

HOW WELL ARE STATES COPING WITH THE SLOW ECONOMY AND STRUCTURAL BUDGET PROBLEMS?

With budgets squeezed both by the current economic downturn and, in many cases, by longer-term structural problems, states are responding with a mixture of short-term fixes, spending cuts, and tax increases, according to a new study from the Center on Budget and Policy Priorities.

The Center's study, State Responses to Tight Fiscal Conditions, looks behind the data on how states are faring in the slow economy to examine how states' budgetary responses could affect their fiscal stability if a robust economic recovery does not occur soon. It also provides a more in-depth look at four states — Indiana, Minnesota, Texas, and Virginia — to illustrate the range of issues states are facing and the range of policies they have adopted.

"If the slowdown continues or deepens, more and more states will face budget shortfalls and problems in states already affected could intensify," noted Kevin Carey, a Policy Analyst with the Center's State Fiscal Project and lead author of the report. He added that this year's federal tax cuts will worsen states' fiscal situation by reducing revenue from state income and estate taxes and possibly requiring cuts in future federal grants to states.

"With all these uncertainties, it's important to examine whether states are handling the slowdown in ways that won't cause bigger problems later — especially for low-income and other vulnerable populations, which often are the hardest hit by a weak economy," said Carey.

The budget imbalances some states face are temporary and reflect the slow economy. However, other states — including Tennessee and Texas — have structural problems: their tax systems don't raise the amount of money the state needs over the long term. (Some states face both temporary and structural problems.) Budget-balancing strategies that make sense for states with temporary imbalances could be ineffective or harmful for states with structural problems.

In particular, short-term fixes are a popular alternative to raising taxes or cutting programs, and a number of states are using them to close fiscal gaps. At least seven states (California, Indiana, Kentucky, Michigan, Mississippi, Ohio, and Washington) have begun to tap state "rainy day" funds or other reserves to balance their budgets, for example. In addition, states such as Indiana, New Hampshire, Texas, and Virginia have used accounting gimmicks like artificially shifting expenditures to a later fiscal year or simply raising their revenue estimates without economic justification. "For many states, today's budget gimmick can create tomorrow's budget crisis," said Center Deputy Director Iris Lav, a co-author of the report.

The use of certain short-term measures — such as drawing down rainy day funds or enacting temporary tax increases — may be appropriate in some cases, enabling states to maintain vital services until revenue growth rebounds. However, if an economic slump is prolonged, or if the state's budget imbalance primarily reflects structural problems, these measures will only make it harder for states to balance their budgets in future years.

While some states are adopting short-term fixes to balance their budgets, seven states (Arizona, Indiana, Maine, Nevada, New Hampshire, New Jersey, and West Virginia) have raised revenues significantly. Mississippi, Ohio, and South Carolina have enacted across-the-board spending cuts, while Indiana and Kentucky have set the stage for cuts in Medicaid spending by appropriating less money than the programs are projected to require.

In some cases, states' budget problems highlight the need for better budget information. "Some states may have adopted tax cuts or spending increases in the 1990s without taking into account their ultimate cost," noted Liz McNichol, director of the Center's State Fiscal Project and a co-author of the report. "This made them more vulnerable to budget problems when the economy slowed." Such states, she added, should consider adopting budget process reforms to give policymakers and the public a clearer view of the consequences of policy choices.

The Center on Budget and Policy Priorities is a nonprofit, nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs. It is supported primarily by foundation grants.

ALABAMA Arise Citizens' Policy Project Kimble Forrister P. O. Box 612 Montgomery, AL 36101 (334) 832-9060	INDIANAPOLIS Indiana Coalition on Housing and Homeless Issues Beryl Cohen 324 W Morris Street Indianapolis IN 46225 (317) 636-8819	PENNSYLVANIA Pennsylvania Partnerships for Children Diane McCormick Deputy Director of Communications 20 N. Market Square, Suite 300 Harrisburg, PA 17101-1632 (800) 257-2030
CALIFORNIA California Budget Project Jean Ross 921 11th Street, Suite 50 Sacramento, CA 95814 (916) 444-0500	KENTUCKY Kentucky Youth Advocates Abby A. Hughes Holsclaw 624 Shelby Street Frankfort, Kentucky 40601 (502) 875 4865	TENNESSEE Tennessee Budget Project Ginger Hauser 2012 21st Avenue, South Nashville, TN 37212 (615) 385-2221 ex. 23
COLORADO Colorado Fiscal Policy Institute Adela Flores Policy Analyst 623 Fox Street, Suite 300 Denver, CO 80204 (303) 573-5421	MICHIGAN Michigan League for Human Services Sharon Parks 1115 So. Pennsylvania Ave., # 202 Lansing, MI 48912 (517) 487-5436 Ext.212	TEXAS Center for Public Policy Priorities Eva Deluna 900 Lydia Street Austin, TX 78702 (512) 320-0222
CONNECTICUT CT Voices for Children Douglas Hall, Ph.D. Senior Policy Fellow 33 Whitney Avenue New Haven, CT 06510 (203) 498-4240	MINNESOTA Minnesota Council of Nonprofits Nan Madden Director, Minnesota Budget Project 2314 University Ave W #20 St. Paul, MN 55114 (651) 642-1904	VIRGINIA Virginia Organizing Project Ellen Ryan 703 Concord Avenue Charlottesville, VA 22903-5208 (434) 984-4655
IDAHO Idaho Center on Budget & Tax Policy Judith Brown Director c/o United Vision for Idaho 1412 W. Idaho St. Boise, ID 83702 (208) 331-7028	NORTH CAROLINA North Carolina Budget & Tax Center Dan Gerlach P.O. Box 28068 Raleigh, NC 27611 (919) 856-2158	WISCONSIN Wisconsin Budget Project of the Wisconsin Council on Children & Families Jon Peacock 16 N. Carroll Street, Suite 600 Madison, WI 53703 (608) 284-0580 ext. 307
ILLINOIS Voices for Illinois' Children Andrea Ingram 208 South LaSalle, Suite 1490 Chicago, IL 60604 (312) 516-5556