May 9, 2003
SEVERE STATE FISCAL
CRISIS MAY BE WORSENING
Nicholas Johnson and Rose Ribeiro
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States have closed, or are closing, about $80
billion in budget shortfalls for the current fiscal year (which ends June 30
in most states) and another $79 billion in shortfalls for FY 2004, according
to the National Conference of State Legislatures. Forced by balanced
budget requirements to close these deficits, states have been cutting
important programs and services, including education, health care, and
Now the crisis appears to be worsening. New
data show that in a number of states, including
North Carolina, and
Pennsylvania, revenues for April fell
short of expectations, so these states are raising their deficit forecasts.
Clearly, states are unlikely to pull out of the fiscal crisis by themselves
anytime soon. Without new revenues, states are likely to enact increasingly
painful budget cuts.
What Public Services Are
Examples of Cuts in Services
— Some 50 school districts are shortening the school year.
— Some 17,000 children are losing child care subsidies.
— almost 900 non-violent offenders were released early from prison.
States spend most of their money on education,
health care, public safety, and human services. All of those areas
have been subject to sharp reductions in recent months, and more cuts lie
Health care. Hundreds of thousands of people
nationwide have already lost Medicaid coverage due to state budget cuts.
That number will climb to 1.7 million people if the cuts proposed by
governors in 22 states for which we have detailed information are approved.
Elementary and secondary education. States such as
Oregon cut public school spending midway
through the current school year. For the upcoming year, at least 18 states
are planning or considering cuts, according to NCSL. The likely
consequences include teacher layoffs, school closures, and shortened school
Higher education. Most states have cut aid to colleges
and universities over the past year. This has resulted in faculty layoffs,
cancelled classes, and large tuition increases, among other measures.
Sixteen states raised tuition by more than 10 percent for the current school
year, and six states took the unusual step of enacting mid-year tuition
hikes for the spring 2003 semester. Also, seven states have already raised
tuition for the 2003-04 school year by anywhere from 10 percent to 39
percent; large tuition hikes are on the table in about 16 other states.
Public safety. Some 19 states are implementing or
considering cuts in corrections spending, according to NCSL. The likely
consequences include paroling nonviolent offenders, moving prisoners to
cheaper out-of-state facilities, or closing prisons.
Aid to local governments. Local governments in most
states are responsible for police, fire, and many other services. A number
of states support local governments through revenue-sharing, but a dozen or
more of these states are scaling those programs back.
Child care and other human services. Many states are
cutting human services spending substantially. For instance, a large number
of states are cutting child care subsidies for poor and near-poor working
families, making it difficult for parents to remain in the workforce. A
General Accounting Office survey issued this week found that 23 states have
reduced access to affordable child care since 2001 through tightened
eligibility, increased co-payments, or other measures. In addition, ten
states plus the
District of Columbia are proposing more
child care cuts for 2004.
Tax increases. A number of state constitutions impose
major barriers to tax increases, such as supermajority or voter-approval
requirements. Nonetheless, some 17 states raised taxes significantly in the
current fiscal year, and some 25 governors have proposed raising taxes for
the coming year. Among the enacted increases are major hikes in income,
sales, or business taxes in
Shortfalls May Be Growing
Though significant, the spending cuts states
have already enacted are far from sufficient to solve their budget crisis.
As of late April, states still faced about $22 billion in shortfalls for
2003 and another $54 billion for 2004, according to NCSL. With rainy day
funds and other reserves largely drained, and with very limited ability to
borrow funds to cover operating costs, states are likely to close these
shortfalls through large spending cuts and perhaps tax increases.
Ultimately, the amount of spending cuts may well
exceed what anyone has acknowledged to date. In the last few days, states
North Carolina, and
Pennsylvania have reported
lower-than-expected revenues for April. Because April marks the end of the
income tax filing season, states pay close attention to April receipts in
developing revenue projections, and often revise forecasts as a result.
The national scope of the revenue problem is
confirmed by U.S. Treasury reports, which show federal taxes coming in below
last year’s levels and lower than expectations. Since state income taxes
use essentially the same tax base as federal income taxes, the Treasury
reports — combined with initial state reports for April — suggest that the
state fiscal crisis may be getting worse and that even more painful measures
may lie ahead.