U.s. State Profit Decline Will Go On, Governors Report Says
The only thing that kept states from “draconian” spending cuts has been $135 billion of funding under President Barack Obamas economic stimulus package, according to a report from the National Governors Associations and the National Association of State Budget Officers. Revenue fell 7.5 percent in fiscal 2009, forcing states to close budget gaps of $72.7 billion.
“These are the worst numbers weve ever seen,” said Scott Pattison, executive director of the budget directors group, in a news release. “States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending.”
As the U.S. economy emerged from the worst recession since the Great Depression of the 1930s, local revenue will trail an economic rebound and continue its decline in 2010 before slowly returning to pre-recession levels by 2012, the report said.
Municipal yields are near a 42-year low even as some states including California and Illinois fund operations with debt. Local officials are banking on rebounding revenue to pay off debt and fund deferred expenses.
States will struggle through most of the next decade because the length of the recession leaves them with an “overhang” of unmet needs, the report said. When recovery begins, officials will have to pay into employee pension and health-care funds and for maintenance, technology and infrastructure investments postponed during the crisis, said Raymond Scheppach, executive director of the National Governors Association, in the release.
Tax Increases
In fiscal 2010, which began for most states July 1, officials increased taxes and fees by $23.8 billion and 33 states cut spending by $53.5 billion, according to the report.
“States will also need to rebuild contingency or rainy day funds,” Scheppach said. “States will not fully recover from this recession until late in the next decade.”
States, cities and counties that entered the recession with underfunded pensions and then suffered investment losses or opted to defer contributions may have their credit ratings cut, Moodys Investors Service said in a Nov. 6 report.
Moodys analysts cited several pension-related issues that may signal fiscal stress for municipalities. They include an asset-to-liability ratio “significantly below” similar retirement systems, an “overt” cut in the money a government contributes to its funds or changes in actuarial firms or plan assumptions to produce different results, the New York-based rating company said.
California Experience
Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are dealing with declining tax revenue, resurgent deficits and increasing unemployment and home foreclosure rates, the center, a Washington, D.C.-based public policy research group, said in a report yesterday. All but New Jersey, Illinois and Wisconsin also have been hampered by a rule requiring a two-thirds legislative vote to approve tax increases, the report said.
Lawmakers in California, which accounts for 13 percent of the U.S. gross domestic product, have slashed $32 billion from spending, cutting into funding for schools, universities and welfare programs and raised taxes by $12.5 billion in the last nine months to close budget gaps brought on by the recession. Governor Arnold Schwarzenegger signed an $85 billion budget on July 28. The state expects another $14 billion of deficits over the next 19 months.