Dealing With Deficits in Anti-Big Government Administrations

Governors who campaigned against stimulus spending face hard choices.
by | December 2010

In the anti-government, anti-spending tsunami that swept election campaigns this fall, no one rode the opposition harder than Florida’s Rick Scott. He hammered away at the federal stimulus program, which pushed hundreds of billions of dollars to the states. “The stimulus has not created one private-sector job,” the Republican gubernatorial candidate told reporters in September.

He was one of the champions, but his strategy had many allies. The campaign against big government certainly resonated with voters, but that campaign rhetoric is now colliding with budgetary reality. In Florida, for example, federal stimulus dollars total nearly $9.5 billion over two years.

But with this year’s final stimulus payment, the state faces a big structural deficit -- and the same tough questions confronting every state: Will the economy recover fast enough to fill the hole left by expiring stimulus dollars? Or will the economy continue to stagger and leave the states with mega-deficits? Has the anti-government mood made it impossible for Washington to provide any more aid to plug the gap? As the economy starts to recover, will staggering states slow the uptick?

There’s no doubt the economic downturn would have been far worse for state budgets if not for the stimulus. It was “a godsend,” says Scott Pattison, executive director of the National Association of State Budget Officers. But according to a September study by the National Conference of State Legislatures (NCSL), we’re bouncing along the bottom -- NCSL forecasts that 40 states will see higher revenues in fiscal 2011, but revenues will remain flat in six states and decrease in one. Revenues in three states are uncertain.

While that’s ultimately good news, the longer term is much more uncertain. When the Great Recession hit, analysts debated whether the downturn and recovery cycle would resemble a V, with a sharp drop followed by a quick recovery; a U, with a big drop, then bouncing along the bottom before a slow recovery; or an L, with a steep decline to a “new normal” far below the levels of the old economy.

Budget cheerleaders begged, “Give us a V!” But we’re now deep enough into the economic crunch to know that the drop was far deeper and the recovery much more sluggish. The big questions, now that we’ve hit bottom (we hope), are how far and how fast we’ll bounce back. Will it be a U, with a slow but steady return to a pre-recession economy? Or will it be an L, with an economy that eventually settles at a lower level?

This question matters for much more than taxes and support for local schools and state highways -- big budget cuts can create, and have created, cyber-security gaps, according to a recent survey by Deloitte and the National Association of State Chief Information Officers. More than three-fourths of state CIOs report that while cyber-threats were growing, their budgets were stagnant or slashed. “Unprecedented budgetary cuts across state governments and growing reliance on contractors and outsourced IT services are creating an environment that is even harder to secure,” reported Utah CIO Steve Fletcher.

Then there’s Medicaid, the federal-state health-care program for the poor. The stimulus program boosted and then extended federal support for the program to the states, but that’s scheduled to ratchet down in the coming months. Will state revenues rise quickly enough to plug the gap? Or will state budgeters be forced to make deeper cuts in other state programs to fund the Medicaid entitlement? At a time when states are being pushed to the front of health-care reform, that would be a tough trade-off.

What’s the answer to these questions? It depends on where you’re living. NCSL forecasts that in the coming year, personal income tax collections will rebound in 35 states. Three states are projected to win big when it comes to tax revenue: Louisiana (up 11.2 percent), Delaware (up 14.3 percent) and Oregon (up 15.3 percent). On the other hand, income tax revenues are expected to be flat or decline in four states (Alabama, New Jersey, South Carolina and West Virginia).

So just as a ride through Las Vegas and Miami shows that the recession hit some regions far harder than others, the recovery will not float all boats equally. The stimulus program’s end will bring a reign of pain to some state budget officials in regions where the recovery proves especially sluggish.

Overall, very few states will see revenues bounce back fast enough to escape tough decisions. State government budgets -- and the budgets of local governments, which depend so heavily on property taxes and the beleaguered housing market -- are likely to bring up the rear of the recovery. Some states are likely to trail the rest of the pack.

Many Washington officials are quietly grumbling that they took the heat for decisions that helped plug gaping budget holes in state budgets. They’re not likely to be in any mood for a new round of aid to the states, especially if new state budget crises settle in just a few regions.

Many of the nation’s new governors ran anti big-government campaigns -- and they’ll face tough choices for which they haven’t prepared the voters. The really tough state budget questions are lurking just over the hill.

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