Finance

Shortfall Shock

Given a climate of national recession, Maine's budget process went pretty smoothly in 2009. Despite some scary revenue shortfalls, the legislature passed a $5.8 billion budget bill...
by | June 30, 2009
 

Given a climate of national recession, Maine's budget process went pretty smoothly in 2009. Despite some scary revenue shortfalls, the legislature passed a $5.8 billion budget bill in May--a month ahead of schedule--by overwhelming bipartisan majorities in both chambers. Governor John Baldacci signed it the next day. "Instead of giving in to the path that has lured many of our colleagues in other states to gridlock and stalemate," Baldacci said, "Democrats and Republicans, conservatives and liberals and folks in the middle came together to pass a state budget that is fair, reasonable and responsible." And, he might have added, without raising taxes.

Even so, the final result looks pretty drastic. The total state budget in Maine shrunk by $500 million from the previous biennium's $6.3 billion. Spending is heading down in actual dollars for the first time in 35 years. Of course, the governor and legislature can legitimately claim that by acting early, they prevented a bigger crisis. Without quick passage of a budget, the state would have run out of Medicaid money weeks before the July 1 start of the fiscal year. The appropriators felt they made the best they could out of a bad situation. And while the overall spending reduction seems huge, budget writers can claim that they were able to work through this year's problems without some of the massive disruptions that they had feared.

Unquestionably, residents in every corner of the state will suffer. State employees are getting hit on both wages and benefits, with 20 unpaid furlough days over the next two years, plus an increase in health insurance costs and a freeze on raises for merit as well as seniority. Public hospitals and universities will be looking at smaller payrolls and smaller workforces. In fact, says Christopher St. John, of the Maine Center for Economic Policy, "there is no function of state government, whether inland fisheries and wildlife or environmental protection or transportation," that won't be facing serious challenges just to continue the work it's been doing.

Similar stories can be told in practically every state. But the real problem may be that the news coming out of capitols hasn't been shocking enough. States have used the federal stimulus money in most cases to ease the current shortfalls, rather than to help them face up to the prospect of future long-term deficits. (Stimulus dollars made up about 40 percent of states' shortfalls this year.) Rather than planning ahead, lawmakers such as those in Maine have done their best to muddle through this year's woes, hoping that an economic turnaround will make budgets easier to deal with in the near future.

That, however, seems unlikely. Many states begin this new fiscal year looking at fresh shortfalls that will require action within a matter of months. State revenue sources tend to be lagging indicators, meaning that even if the economy were to start growing again tomorrow, it would take quite a while before tax collections perked up. The one-time funds that were used to close gaps this year are now largely depleted. There will still be some stimulus dollars to play with next year, but then those will run out. Over the next two years, the 50 states could easily be looking at a collective gap of $200 billion beyond what the stimulus will cover, with no further help in store from the feds. "The budget process absolutely focused just on the next two years," says Christian McNeil, of the think tank Grow Smart Maine, "operating on the assumption that the stimulus money is going to continue to be there, when the inconvenient truth is that it's going to be gone."

Jay Emler, who chairs the Ways and Means Committee in the Kansas Senate, makes a similar point. "There are really some tough decisions out there to be made," he says. "All the stimulus did was delay the decision-making for one year on the hope and a prayer that the economy is going to turn around enough to get us where we need to be, and I don't think it's going to happen."

That suggests what may be the single biggest irony of the budget-writing experiences of 2009. Legislators in virtually every state chose to attack short term problems with short-term solutions, finding money anywhere they could--the federal stimulus law, rainy-day accounts--to avoid having to make draconian reductions in state programs and services. And yet in almost all of those states, the effect is turning out to be traumatic anyway.

Utah is a good example. It hasn't suffered as much fallout from the housing boom and bust as some of its Southwestern neighbors, but state officials nonetheless began their budget process this year staring at a 12 percent hole in the revenue stream. Because of the recession, the Medicaid caseload had expanded by 15 percent in just a couple of months, while food pantries were experiencing a 30 percent increase in demand. The population of homeless centers rose ominously.

The legislature, doing its best to save money without getting into program specifics, simply imposed across-the-board cuts on most agencies and departments. At ground level, this meant, for example, a funding reduction of nearly 40 percent for a program that provides disabled adults with stipends of $261 per month.

This program has helped many adults who are unable to work keep body and soul together while waiting out the often years-long process of applying for federal disability assistance. The state effort has been around since the 1970s and has enjoyed funding as high as $12 million. Last year, funding stood at $8 million; it's been cut to $5 million for the new fiscal year--an amount program advocates feel they were lucky to get. Matt Minkevitch, executive director of The Road Home, which operates Utah's largest homeless shelter, predicts the disability cutbacks will result in 500 to 600 more people showing up at his shelter--where demand has already increased 52 percent over the past two years.

Utah's Department of Workforce SerĀ­vices launched a concerted effort to find the best possible solution for coping with such a large cut, convening a three-day workshop at which department officials and various outside stakeholders discussed how to revamp the disability program to operate with a much smaller budget. And it is being revamped. But the outcome won't be a happy one for the program's clients. The new design drops people with "serious barriers to work," such as substance abuse and mental health issues. The core group of disabled adults who are unable to work at all will face the prospect of tighter eligibility and a shorter benefit period. "We don't know that there are any other stopgaps from other organizations that can work with this population," says Melissa Smith, an analyst with the Community Action Partnership of Utah. "They will be in homeless shelters without any financial help at all."

Whether a government entity chose mostly to plug short-term holes, as Maine's legislature did, or took a stab at long-term reorganization, as the Utah workforce service agency did, there is common agreement that the budgetary situation will continue to get worse, not better. Income tax revenues were down from last year by upwards of 40 percent in some states during the key collection month of April. Closing out the 2009 legislative session, Texas House Speaker Joe Straus conceded that the next biennial session in 2011 will be "more challenging" than in 2009--even as the legislature adjourned this year without passing necessary bills to keep five agencies, including the Department of Transportation, in business.

Georgia is another state that managed to muddle through a bad situation this year, closing a $3.3 billion shortfall, but left itself open to further difficulties down the road. The stimulus filled $1.4 billion of the fiscal hole, while the state depleted its rainy day accounts to come up with another $300 million. That left $1.6 billion to cut, because proposed tax increases on tobacco and a plan to impose new fees on hospitals and medical providers went nowhere in the legislature. Nearly every department in Georgia ended up with cuts this year ranging from 6 to 10 percent, with some losing as much as 14 percent. Governor Sonny Perdue sought to limit reductions in education and health care, but the only program that was spared any cuts at all was Medicaid.

Looking ahead, Georgia can count on only $1.1 billion in stimulus dollars to use to shore up its budget next year. That's assuming the state doesn't have to dip deeper into stimulus dollars to fill fresh holes this year. Georgia also has appreciably less money in its reserve funds. Even if revenue projections hold, the state will have to come up with hundreds of millions of dollars to fill gaps that have been papered over this year using one-time funds. "If there's not revenue growth, we're looking at a $700 million to $800 million hole in 2011," says Alan Essig, of the Georgia Budget and Policy Institute, "and $2 billion in 2012--and then the stimulus is gone. And that's if the economy grows."

Plenty of states cut deeply but not very selectively this year, hoping to keep alive as many programs as possible in hopes that funding can be restored in the next budget. But that avoidance of hard choices will make the ultimate problem more difficult, not easier. "Every time we have a budget crisis like this, we go to these across-the-board cuts, rather than asking the question of what structurally needs to be changed in state government," says Christian McNeil, of Grow Smart Maine.

Rather than doing 10 percent less of everything this year--and then having to cut another 10 percent next year--states might more sensibly have opted for a kind of triage budgeting, identifying top priorities and directing reduced resources toward those programs deemed essential. Maine at least is making an effort to move in this direction. Despite its budget shortfall, it boosted K-12 school spending slightly this year to give districts time to prepare for cuts that are already scheduled for 2011. Governor Baldacci has previously sought administrative savings through consolidation of school districts and the state and local corrections systems, and now he's looking for more.

As part of the state's new two-year budget process, finding $30 million to cut in fiscal 2011 will be the responsibility of a government streamlining commission comprised of administration officials and the Appropriations Committee. Thirty million isn't much, even in a small state such as Maine, but the governor is hoping that the exercise will trigger a deeper, more thoughtful look at state services than is typically the case. "During the regular appropriations process, we didn't have time to get into the minutiae of programs, layer by layer" says state Senator Bill Diamond, the committee's co-chair. "This will require us to rethink, reinvent and redo, if you will, the way we do business. Who knows--we might find a lot more than $30 million."

Josh Tardy, minority leader for House Republicans in Maine, says he's only "lukewarm" about the commission's prospects. Too often, he suggests, such efforts fail to deliver on their promised savings. But he applauds the idea of taking a deeper look at how the state operates and what it can actually afford to do, rather than continuing to plug holes using one-time money--especially since the state is relying on revenue assumptions that he worries may prove overly optimistic in tough times.

"If the economy does not turn around--and certainly many indicators suggest we're going to be a while getting out of this--the next legislature and the next governor are going to have a significant gap to address," Tardy says. "The reality right now, from my perspective, is that structural changes and cuts in state budgets and the services that states provide are going to have to happen."

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