It's no secret that the federal government is running up an enormous debt, but many state governments are not doing much better. The recession, by reducing the revenues flowing into state capitals, has been part of the problem, as have powerful lobbies that fiercely protect their pet programs.
Nearly every state has had big budget shortfalls, and they're dealing with them in different ways. In some cases, even culturally similar neighbors are taking sharply divergent paths. Four WORLD reporters took a look at state budgetary politics in four different parts of the country. Here's what they found.
Virginia & Maryland: Tightened belt vs. "death spiral"
It is a well-worn phrase, but elections really do have consequences. And for Virginians, last November's results likely lightened their tax load.
Before Virginia's outgoing Democratic Governor Tim Kaine left office earlier this year, he submitted a budget proposal that included $2 billion in tax hikes to combat the state's $4 billion shortfall.
But Kaine's successor, Republican Robert McDonnell, proposed a different solution: $4 billion in spending cuts and zero tax increases.
Unions balked at the reductions, claiming that 37,000 government jobs would be lost. But conservatives, like Michael Thompson with the state's Thomas Jefferson Institute for Public Policy, told me that making up the state's revenue gap with a tax increase would force greater job losses on a sector more crucial to a state's long-term economic health-private businesses.
In the end, McDonnell's plan prevailed, even in a Democratic-controlled state Senate: Virginia tightened its fiscal belt. It will eliminate travel expenditures, reduce administrative expenses, and consolidate agencies.
It is one of the largest spending reductions in state history. Few programs were spared-$646 million in education cuts combined with a new law making it easier to establish charter schools. But the state is trying to do what its citizens have been forced to do during this recession-live within its means.
After tax collections fell two years in a row for the first time since the 1930s, McDonnell put off his own campaign promises to boost dollars for classrooms, to create 100,000 more degrees at state colleges, and to improve the state's roads. "When you are in a hole, the first thing you do is stop digging," explained Jonathan Williams with the right-leaning American Legislative Exchange Council (ALEC).
The rolling of state spending back to 2006 levels begins what state conservatives hope is a four-year experiment on limiting government's size and scope to core priorities. The mindset, epidemic among state governments, that when there is money on the table you have to spend it or lose it next year, must end.
"If there is a silver lining with this recession, it is giving government a chance to take a look and ask if we really need to do this?" Thompson said.
This marks a change from 2004 when then Gov. Mark Warner introduced the largest tax increase in state history. Then a GOP-controlled House of Delegates lacked the will to stop the hike. But this time the backs of lawmakers were stiffened by what Ben Marchi with the Virginia chapter of Americans for Prosperity called a "perfect storm": A worsening fiscal crisis combined with the recent growth of the federal government has fueled unprecedented grassroots activism.
Last week McDonnell signaled that he is not done. He proposed 96 amendments that cut $51 million more to the two-year $82 billion budget. These cuts ranged from the controversial (an additional $10 million cut to services for at-risk youth programs already facing a $86 million hit) and the obvious (elimination of dollars that allowed state employees to get erectile dysfunction drugs using their state health plans). Alas, the amendments included $42.1 million in new spending. Old habits die hard in the nation's state capitals.
When the 2010 edition of the Maryland General Assembly ended with its traditional midnight confetti drop during the first seconds of April 13, multi-colored balloons rained down onto weary lawmakers. But the 90-day session concluded with lawmakers failing to puncture one balloon that just keeps growing: the state's annual budget shortfall.
Nine of its 10 congressional representatives are Democrats, and Maryland's proximity to Washington means it continues to feed from the federal trough rather than make tough choices: The state's just approved $32 billion budget for the next fiscal year props up a $2 billion gap with federal stimulus money while cutting just $120 million in spending.
Democratic Governor Martin O'Malley proposed a bevy of one-time fund transfers ($300 million in highway user fees to the general fund) and borrowing that amounted to little more than accounting gimmicks. These short-term fixes have many worried that future sessions will have to deal with even bigger annual shortfalls. The lack of political will in Annapolis leaves the state facing near-record shortfall projections of $2 billion or more per year through 2015. It means tax hikes could be around the corner, especially if the state stays in Democratic hands after this November's gubernatorial election.
"We are in a death spiral," state Sen. E.J. Pipkin, a Republican from the state's Eastern Shore, warned his colleagues in the session's final days. Only two Republicans voted for the budget.
Former Republican Gov. Robert Ehrlich, who is trying to regain his post this fall, accused the lawmakers of "kicking the can down the proverbial alley . . . waiting for the monumental tax increases everyone knows is coming."
This state budget seems designed to get Democrats through to the next election without raising taxes. O'Malley held back his tax increase urges: In 2007, his first year in office, he raised taxes, including boosting the sales tax from 5 percent to 6 percent. But three years later the budget problems remain.
Why? Unintended consequences often follow tax increases. When Maryland raised its top tax rate to 6.25 percent, the state lost $1 billion of its net tax base in 2008 due to migration. "You don't enact tax increases inside of a vacuum," said ALEC's Williams, also an author of Rich States, Poor States.
This time around, state legislators relied on a heavy dose of budget bailouts from Uncle Sam. Federal stimulus dollars account for almost $1.3 billion, or more than 8 percent, of the budget. Rather than stimulate, Maryland is using federal taxpayers' dollars to fund normal expenses. So when Washington's welfare for states disappears next year, Maryland will be facing a fall.
"Maryland has not been reining in spending at all," Gabriel Michael with the Maryland Public Policy Institute told me. "This is an extra billion dollars we will have to come up with. There will be a scramble to come up with the money." -Edward Lee Pitts
New Jersey & New York: Buried in debt
Jeff Scheininger is one of the millionaires whose tax return is at stake in New Jersey's budget battle.
"We're in the hose business," he says, barreling through his warehouse to show where his 18 employees manufacture stainless steel, Teflon, and silicone hoses for Flexline, the small business his father started in 1950. In the last eight years, he's seen his customers leave New Jersey and his business shift to Pennsylvania and overseas. "It's crushing. It's just crushing. I don't have anyone left to sell to," he said. Then he saw his taxes go up with the "millionaire tax," a surcharge on anyone, including small businesses, making over $400,000. In New Jersey's fight to close an $11 billion budget gap, the battle is coming down to the teachers versus the so-called millionaires. Republican Gov. Chris Christie wants the surcharge out. The teachers unions want it in.
Christie proposes cutting $820 million from school aid. He's enticing teachers to take a wage freeze to offset the cost, promising he'll give their districts the money the state will save on the teachers' Medicare and Social Security tax withholdings. So far, administrative staffs in 145 districts and teachers in 20 districts have agreed to the deal. Other union leaders aren't as open. A Bergen County (New Jersey) Education Association leader sent out a memo that joked, "Dear Lord this year you have taken away my favorite actor, Patrick Swayze, my favorite actress, Farrah Fawcett, my favorite singer, Michael Jackson, and my favorite salesman, Billy Mays. I just wanted to let you know that Chris Christie is my favorite governor." The governor wants the union leader fired. The union apologized but refused to fire the leader: just one more battle between the two.
Michael Riccards, executive director of the Hall Institute for Public Policy-New Jersey, said unions usually like to make friends with public officials instead of enemies, but this time the unions early on have gone after Christie: "He returns their fire in kind." While Democrats control both the Senate and Assembly, Riccards said they haven't gone out of their way to defend the teachers unions: "I think they're a little fed up too."
Democrats are, however, pushing to restore the "millionaire tax"-a surcharge of 10.25 percent on incomes over $500,000 and an 8 percent bracket for those making between $400,000 and $500,000. This was supposed to be temporary and Christie proposed discontinuing it, to an outcry. So far he has held his ground but also broken a campaign promise, suspending a property tax rebate program in a move his opponents say will hurt suburban and middle-class families. Because of a deal former Gov. Jon Corzine cut with the unions, Christie will have to wait until January to lay off 1,300 state workers. So for now, state payrolls stay bloated.
An oft-quoted study by Boston College found that New Jersey has lost $70 billion of wealth between 2004 and 2008. Scheininger blames the punitive business climate and welcomes the end of the millionaire tax: "If you're a small business guy who's trying to keep your cash flow positive and have monies to invest, it can't hurt."
He adds, "We are a cautionary tale for the rest of the country. We are a cautionary tale for those members of Congress who think that the unprecedented [spending] levels that they're racking up now won't wreck economic activity. We're a cautionary tale for the Obama administration. The bills come due. They really do."
Across the East River, New York is in the same kind of gridlock. . Lt. Gov. Richard Ravitch has proposed a plan that would let the state borrow up to $2 billion a year, but the money comes with strings attached. The state would have to use better accounting principles to make deficits more transparent. An independent financial review board would make sure the budget is balanced every quarter and if it's not, the governor would have the power to impound spending.
Elizabeth Lynam, deputy research director for the Citizens Budget Commission (CBC), warns that if the state doesn't adopt the accounting standards that Ravitch proposes and simply borrows wildly, deficits will continue to balloon. Lynam said the state's temporary stopgaps are supposed to relieve financial pressure just until the state can get its finances in order. The stimulus was one stopgap, and this $2 billion in borrowing might be another. But "so far there has been no movement towards that future where we're reining in our spending," she said.
Gov. David Paterson, a lame duck governor dogged by allegations that he pressured a woman into dropping a domestic abuse case against one of his closest aides, has proposed the leanest budget so far. And even that one, CBC calculates, will leave the state with a $12.4 billion budget gap in 2013-2014.
The governor's budget raises $1 billion by increasing fees and taxes on things like cigarettes and sugary drinks. It also proposes $5.5 billion in recurring cuts, with the bulk of the cuts coming in school aid, Medicaid, and agency spending. New York spends $15,981 per K-12 pupil compared to the national average of $9,666. Even with Paterson's education cuts, the state will have increased education spending by 42 percent since 2003-2004.
The governor is cutting only $1 billion from Medicaid. The Empire Center for New York State Policy notes that although New York covers half as many people as California does, it spends 25 percent more on Medicaid. New York's Medicaid spending per enrollee is $7,927 compared to the national average of $4,575.
The Governor, Senate, and Assembly are still wrangling over the cuts, with the Senate and Assembly proposing plans that leave the state with a budget gap. The worst case scenario would be a repeat of last year: The governor and legislature cobbled together a shaky budget that didn't deal with future gaps. Revenue continued to plummet, spending continued to soar, and midway through the fiscal year the state found itself with a projected $3.2 billion budget deficit. -Alisa Harris
Indiana & Illinois: Alike and different
Indiana and Illinois have much in common. Both can claim Abraham Lincoln and the Wabash River as native forces that have shaped their heritage and landscape. Culturally, the people from the two states tend to enjoy basketball and country music.
When it comes to managing their finances, however, the two states' government officials have gone their separate ways.
In recent years, Indiana has ranked among a handful of states running a budget surplus-though now state officials are spending those reserves to compensate for the effects of the recession on state revenue. Illinois, meanwhile, must grapple this year with a budget deficit of nearly $13 billion. The Wall Street Journal in February identified the state as facing "one of the biggest state budget crises in the nation."
Indiana's fiscal discipline is partly an extension of its top elected office-holder's philosophy and style. Gov. Mitch Daniels, a Republican, famously earned the nickname "the Blade" when he worked under President George W. Bush as director of the Office of Management and Budget. The nickname sprang from Daniels' constant recommendations to slash federal budgets wherever possible, and he has continued his propensity for budget-cutting as governor.
He has cut about $800 million per year from the state budget in each of the last two years, according to state figures. He has directed most state agencies and departments to trim 20 percent from their budgets. Daniels aide Brad Rateike declared, "We've been cutting government spending since 2005, even before the recession was adversely impacting revenue collections. When you account for inflation and population growth, our spending has been reduced about 1.3 percent per year since the governor took office."
Over the past three years, Indiana has maintained a relatively flat budget of $13.5 billion since previous years' reductions.
The approach has earned Daniels both fans and critics. Daniels announced late last year that K-12 education would have to share in the budget reductions-trimming $300 million from public schools statewide.
This spring, districts across the state have been forced to lay off hundreds of teachers and other school employees. In school board meetings, school officials have routinely blamed the governor for forcing them into the painful exercise of handing out pink slips to teachers.
Daniels didn't like having to make that particular decision, either, Rateike said: "K-12 education was a last resort. Everything else was reduced earlier and much deeper."
In Illinois, meanwhile, the financial picture is bleak. "Illinois' bond rating is the second-lowest in the nation, just a few steps above junk status," noted Laurence Msall, president of an Illinois policy think tank called the Civic Federation.
The state has fallen far behind on scheduled payments to state-supported institutions and programs, Msall noted-currently owing nearly $500 million, for example, to the University of Illinois.
Gov. Pat Quinn, a Democrat, has proposed increasing individual income taxes in his state to 4 percent from 3 percent as a first step to begin cleaning up the state's fiscal mess. Neighboring Indiana's state income tax rate is 3.4 percent.
Without the tax increase, Quinn has told legislators the state must cut $1.3 billion from K-12 education and $380 million from human services.
Illinois' fiscal problems predate the economic downturn of 2008, Msall noted. "Since 2002, the state of Illinois has run a general funds deficit, usually because of a deficit carrying over from the prior fiscal year," Msall said. "The scope and reach of the crisis has been made worse by inaction on the part of successive general assemblies and governors to curb spending."
Msall gives Quinn and the state's current legislature credit for taking steps to reform Illinois' pension system for state employees into a more affordable and sustainable program, but overall he sees few positive signs in Quinn's proposals for the state's fiscal future. "The governor's budget recommendation does very little to address the $12.8 billion deficit the state faces in the coming fiscal year," Msall said. "It is not a balanced budget and it relies heavily on borrowing to pay for operations."
Despite their proximity and similar cultures, Indiana and Illinois offer a sharp contrast on the matter of financing a state government. Perhaps, though, the disparate scenarios intersect at a common lesson on the importance of a state government-just like an individual household-living within its means. -William McCleery
Arizona: Cuts and rumors of cuts
Thanks in part to the housing market crash, Arizona's state budget crisis ranks second only to California's. The actual numbers are leagues apart-Arizona's shortfall is estimated at $2.6 billion compared to California's $20 billion-but as a percentage of state expenditures, they're in the same boat.
However, there's a big difference in the way the two states are viewed nationally when it comes to dealing with the problem. While the Democrat-controlled California legislature is roundly perceived as resistant to any spending reductions, Business Week highlighted Arizona as one of few deficit-facing states willing to make deep cuts. In a feature story on social services being sacrificed to fill in budgetary gaps, NPR cited Arizona as one of the "hardest hit." And Stateline.org, the online news arm of the Pew Research Center, called the cuts in the budget Arizona lawmakers approved on March 11 "staggering" and "dramatic."
While it's fair to say that the Grand Canyon state is more conservative and thus more open to budget cutting than its coastal neighbor (a recent Arizona Republic editorial joked, "In Sacramento, lawmakers can't bring themselves to cut a loaf of bread"), some local policy experts say that characterizations of Arizona as a cost-cutting trailblazer are wild exaggerations. They say many of the so-called cuts being alternately touted and condemned on the national stage amount to little more than creative accounting.
State Treasurer Dean Martin, who is running against incumbent Jan Brewer for the Republican gubernatorial nomination, argues that what appear to be large spending reductions in public education and Medicare are really just spending delays. "Everybody talks about saving billions, but a lot of that is on paper," he says. "The actual money being spent is only being reduced by $240 million." He points to provisions allowing the state to delay paying schools and hospitals for several months with the promise that the payments will be made up in the next fiscal year. "It's kind of like Wimpy from Popeye: I'll gladly pay you Tuesday for a hamburger today," says Martin.
Economist Byron Schlomach of the Goldwater Institute concurs with Martin's assessment that the governor's office is playing fast and loose with the term cut. As an example, he cites so-called reductions in public safety spending that were really a shift in funding sources. "What really happened is that we used gas tax money to pay for that instead of money from the general fund. Is that really a cut?" he asks. Schlomach also contends that the state's recent selling off of state-owned properties to investors-a move California is now looking to emulate-was merely a way to get around borrowing restrictions in the state constitution and not any kind of long-term solution.
The new budget has some real reductions in public service, but Martin says many of these were chosen more to push a tax increase than to address spending. In particular, he says it wasn't necessary to eliminate KidsCare, a program that provided health insurance for 37,000 children from low-income families. He claims the governor's office strategically chose emotionally charged cuts with the aim of making a media splash that would scare voters into approving a 1 percent sales tax hike. "The legislature pushed for a 10 percent across the board reduction in all departments," says Martin, "but the governor's office said, 'No, we will veto that.' They wanted specifically those cuts to health care and public safety identified [to the voters]." A better solution, Martin argues, would be to institute small co-pays for prescriptions and doctor's visits for everyone receiving free state health coverage. (Brewer could not be reached for comment).
However, there is one thing Brewer, Martin, and the Goldwater Institute agree on: One of the biggest obstacles Arizona (and by extension every cash-strapped state) faces in solving budget problems is the federal government.
Though the federal healthcare bill was not signed until after Arizona's 2010-2011 budget was finalized, the new regulations it imposes will strip the state of federal healthcare funding if it attempts to carry out the Medicaid cuts outlined in the new budget. This requirement, known as "maintenance of effort," has prompted Brewer to push for Arizona to join other states in bringing a lawsuit against the federal healthcare overhaul. Martin says that the new federal legislation may make many of the state-level debates on how to cover the shortfall moot: "The healthcare mandate blows a billion-dollar hole in our budget."
Similar federal regulations are in place to deprive states of matching funds if they try to cut spending on education. The fact that the two areas covered by maintenance of effort-education and healthcare spending-also happen to be every state budget's biggest expenditures puts states even more squarely between rocks and hard places. But soon, Schlomach warns, it may not matter what the administration mandates: "Quite frankly, we're at a point where we can't afford to spend enough to get the federal money." -Megan Basham