Unhappy New Year

The new fiscal year starts in most states tomorrow, but don’t expect governors and state legislators to mark the occasion with champagne. From Augusta to Austin, Tallahassee to Sacramento, the mood is dour.

States are facing the worst budget year yet – and that’s saying something following record shortfalls in 2009 and 2010. Revenues are still way down due to high unemployment, leading to a combined state budget shortfall of $140 billion.

As a result, the budgets that take effect tomorrow include more deep spending cuts and tax increases on top of those that states enacted over the past two years. That’s bad for families – and potentially devastating for an economy that remains weak.

Kids in Virginia will return to more crowded classrooms this fall. Public university students in Florida will face tuition bills that have jumped 32% in the last two years. And 2,000 elderly Oregonians with Alzheimer’s disease will no longer have a program to help them get care in their homes rather than an institution.

Making matters worse, as we reported last week, the Senate failed to extend federal assistance that 30 states were counting on to balance their budgets. Without these funds, many states will have to re-open their budgets for even bigger cuts.

The implications for the economy are frightening. As Mark Zandi, chief economist of Moody’s Analytics, wrote in a recent op-ed:

[S]tates and cities will have no choice but to raise taxes and slash jobs and services, which could cut short the still-fragile economic recovery and trigger renewed recession. Governments would have no effective way of responding at that point, making the downturn long and painful. … At the very least, lots of jobs will be lost without more federal assistance.

In fact, states’ actions to close their $140 billion gap without more federal aid could cost the economy up to 900,000 public- and private-sector jobs.

It’s not too late for Congress to bring a little cheer to this dismal situation – they can and should extend needed assistance to states, giving us all a little something to be happy about this fiscal new year.