Economic Data Can be Used to Target State Fiscal Relief Effectively

PDF of this report (12pp.)

By Iris J. Lav, Jason Levitis and Elizabeth McNichol

March 3, 2008

States are experiencing major budget problems; more than half faced or are projecting deficits for the 2009 fiscal year. To meet their balanced budget requirements, many states have had to raise taxes and/or cut expenditures for services such as health care and education — actions that deepen the nation’s economic problems and offset some of the effect of the federal stimulus package enacted earlier this year by removing demand from the economy. As the state fiscal crisis deepens, more states may be forced to take such actions. To date, however, federal policymakers have shown some reluctance to enact federal fiscal relief that would lessen the fiscal pressure on states.

Some of this reluctance stems from a concern that part of the federal aid would go to states that are not experiencing fiscal stress. This concern is reasonable. But it can be addressed by targeting fiscal relief to those states that are facing problems now. Should the economic downturn become deeper and more widespread, relief could be expanded to encompass more or all states.

This report uses three indicators — employment declines, increases in housing foreclosures, and increases in poverty (measured through increases in food stamp participation)to identify states facing the greatest economic distress. For each of these indicators, the report compares the fourth quarter of 2006 — the beginning of the downturn — to recent data. It ranks each state separately on the change it has seen in each indicator, then averages the three rankings for each state to produce a single overall ranking of economic distress. (See box on p. 3 of PDF.)

By targeting fiscal relief to states on the basis of these three economic indicators, federal policymakers can be confident they are aiding states that are experiencing significant problems — and that these problems result from economic forces largely beyond state control.

The 10 states that show the most economic distress when ranked in this manner are Florida, Arizona, Nevada, Rhode Island, California, Delaware, Idaho, Maine, Vermont, and Wisconsin. Nine of these ten states projected budget deficits for fiscal year 2009. Among these nine states, deficits were projected to equal about 17 percent of annual general fund expenditures — a huge hole in these states’ budgets.

Moody’s Economy.com Recommends State Fiscal Relief

“Because most state governments are required by their constitutions to quickly eliminate their deficits, most are already drawing up plans to cut funding for programs ranging from healthcare to education and cutting grants to local government. Local governments are having their own financial problems; most rely on property-tax revenues, which are slumping with house prices. Cuts in state and local government outlays are sure to become a substantial drag on the economy later this year and into 2009.

“Additional federal aid to state governments would fund existing payrolls and programs and so provide a relatively quick economic boost. States that receive a check from the federal government will quickly pass on the money to workers, vendors and program beneficiaries.

“Arguments that state governments should be forced to cut spending that has grown bloated and irresponsible are strained at best. State government spending and employment are no larger today as a share of total economic activity and employment than they were three decades ago. Moreover, arguments that helping states today would encourage more profligacy in the future also appear overdone.”a

a The analysis can be found at http://www.economy.com/home/article_ds.asp?cid=102598.

Of the top 28 states ranked in this manner (excluding Alaska and North Dakota, whose rankings are elevated by data anomalies, as noted below), 24 have projected deficits for fiscal 2009 or 2010, and the other four are seeing revenues coming in below projections and may yet face budget shortfalls.

It should be noted that these data inevitably lag behind actual economic conditions. The foreclosure rate data go through March 2008; the housing situation has continued to deteriorate since then and may be affecting other states. The food stamp numbers go through March 2008, and the employment data go through April. Some states that do not show up in this analysis as having serious economic problems may do so in the future as more recent data become available.

Click here to read the full-text PDF of this report (12pp.)

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