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From CQ Weekly, PETER HARKNESS Strapped for Cash After a few years of healthy growth in revenue, dark clouds are beginning to form on the fiscal horizon for state and local governments, as even some states that have prospered in recent years are seeing a downturn. More worrisome is that the long-term forecast looks considerably worse. 
Arizona, among the nation’s fastest-growing states in the past few years, has experienced a sharp reversal this summer, as collections for personal income, corporate and sales taxes all took a nosedive. Sales tax receipts alone fell to their lowest level in four years. State agencies in Florida are under orders from Republican Gov. Charlie Crist to come up with cuts of between 4 percent and 10 percent to balance a budget that’s now out of kilter by more than $1 billion; some suggested cuts include the release of less risky inmates and halving payments to caregivers of children taken from their parents by the courts. Economists warn that if the Legislature doesn’t reduce spending or raise taxes, the deficit will double in the next fiscal year. It’s serious enough that the state is looking at allowing Las Vegas-style gambling on Seminole Indian lands.
Maryland’s revenue shortfall is more than Florida’s, and Democratic Gov. Martin O’Malley and the General Assembly are mulling over possible tax increases. Virginia is facing an immediate $400 million gap, but a respected fiscal think tank predicts that it will end up growing to $1.2 billion in the next two years. Michigan has been in deep trouble for some time because the auto industry continues to implode; Democratic Gov. Jennifer M. Granholm and the Legislature continue to haggle over how to close a deficit estimated as high as $1.8 billion, probably with another round of spending cuts and a tax increase. Two legislatures were able to enact balanced budgets but only after protracted partisan fights that caused real harm to large numbers of people. Pennsylvania had to shut down much of its government for a brief time. For almost two months, California couldn’t pay nonprofit contractors operating medical clinics, nursing homes and child care facilities. In states such as Arizona and Florida, the main culprit is the collapse in the housing industry, which is being accelerated by the nervous breakdown in the credit markets. That inevitably leads to a downturn in sales taxes as fewer people buy stuff for their new homes. Since a number of states have lowered their property taxes in the past year to offer citizens relief from soaring home values, they’ve put a heavier burden on sales taxes, so the timing isn’t good. But all of this may be a prelude to a much more threatening fiscal storm, approaching just as many states are trying to do more to meet pressing national challenges including medical care, education, infrastructure and climate change. MOVING IN THE WRONG DIRECTION When fiscal 2008 begins, four weeks from now, Congress won’t have completed much of its work on the new year’s budget, especially if a number of appropriations bills are vetoed. That will leave the states facing uncertain funding levels for more than $400 billion in federal grants — but with the knowledge that rising costs for defense, health care, Social Security and particularly interest on the growing debt are continuing to crowd out domestic discretionary spending, which includes most federal aid to states and localities. Beyond the coming delay in updating spending priorities, which could leave the states operating through the fall or beyond with federal help at fiscal 2007 levels, there’s not much chance anytime soon that Congress will reauthorize either the No Child Left Behind education law or the children’s health insurance program. That’s not good news for the states, either, especially at a time when Washington is mandating more — much of it accompanied by either no money or far less money than needed and promised, and at a time when many states, counties and cities are trying to expand their reach and take on more national problems. Then there is the longer-term outlook, and it closely mirrors what experts see for the federal budget. In July, Comptroller General David M. Walker, who has been speaking around the country for the past two years warning of the impending fiscal train wreck at the federal level, personally released a Government Accountability Office report on the future outlook for state and local finances. Not surprisingly, it was pessimistic. Within a decade, it predicted, barring changes in taxes or spending patterns, states will begin to be overcome by their health care obligations, for both Medicaid and insurance for their employees and retirees. The trend lines throughout the report are ominous: All move in the wrong direction as the decades unfold. In a word, current conditions are unsustainable. That might not be so worrisome if everything else remained static. But it doesn’t. Not only is Washington less and less capable of doing anything new, but there’s every reason to believe states and localities will be pressed to take the lead in more and more areas where the federal government isn’t. The question will be how they can afford it. Previous columns: © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
THE STATES AND LOCALITIES