TOPICS > Economy

States’ Budget Woes Threaten Broad Economic Recovery

November 11, 2009 at 12:00 AM EDT
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With the national economy beginning to see glimmers of a comeback, the budget woes of at least 10 states threaten to derail a broad economic recovery. Gwen Ifill reports.
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GWEN IFILL: By now, you have likely seen plenty of stories and headlines, including on this program, about California’s deep budget troubles and the consequences. But a new report finds the Golden State is hardly alone. Nine other states are also in a budget fix.

Rhode Island, New Jersey, Florida, Michigan, Wisconsin, Illinois, Arizona, Nevada, and Oregon all face potential layoffs, tax increases and cuts in services in coming months.

The Pew Center on the States pinpoints several key factors: high foreclosure rates, growing unemployment and loss of revenues brought on by the national recession, poor money management and resistance to new taxes from state lawmakers and voters. To tell us more about what’s happening, we turn to the report’s lead author, Susan Urahn, managing director of the Pew Center on States, and, from Nevada, Jon Ralston, columnist for The Las Vegas Sun. I will start with you, Susan Urahn. How deep does this go?

SUSAN URAHN: Well, I think the — the question that we asked was, if you look behind California, really, how bad is it out there? And we found that several states are struggling with many of the same problems that California has, and that, as they come into the next budget year — which they’re beginning to put together budgets now — and the year after, they’re going to be facing many of the same problems they faced last year. So, the headlines we saw last year in California were also being — being played out in several other states. We’re going to see them again.

GWEN IFILL: I want to talk a little bit about what is the reason for all of this bad news. Is it the economy? Is it the national recession? Or is there some measure of politics involved in the decision-making at the state level as well?

SUSAN URAHN: Well, it’s a little bit of all three. And I think what is — what is really striking about all the states we looked at is — is, in part, how different they all are, different parts of the country, different tax structures, different political structures. I think that, certainly, the — the economy is playing a key role. Several of these states were hard-hit by the housing crisis, by the collapse of the financial structures. So, there is that.

I think the political structures come into play in some states where they have, say, a supermajority requirement to pass tax increases or a budget. And I think Nevada is a terrific example of — of some of those challenges. It just — it, in some cases, limits the kind of solutions that states can put on the table.

Worse than reported

GWEN IFILL: Well, Jon Ralston, this is a perfect place for to you pick up. Tell us about how Nevada fits or doesn't fit into this scenario.

JON RALSTON, columnist, The Las Vegas Sun: Well, I think the Pew report, Gwen, did capture it pretty accurately, but I actually think it's a little worse than how they made it out. I mean, I don't think any state has the combination of factors with the narrow base. It's all the gaming industry -- you know, you can see behind me the Strip -- and construction. Both of those are in the tank. We were the fastest growing area in the country down here in Las Vegas for a while. The market fell apart, highest foreclosure rate in the country. And, remember, our legislature, in some archaic way, meets every other year. So, they have a 24-month budgeting cycle, which is completely unworkable now. And I think that Nevada isn't taken as seriously until a report like this, because our numbers here are so small, a $6.9 billion budget here, $3 billion hole maybe next time. I mean, Arnold Schwarzenegger lights his cigars with $3 billion.

GWEN IFILL: Well, let's compare, then. There's Nevada, which isn't a big budget, but it certainly is emblematic. It's the single economy -- single-industry economy. And it also has the problematical political setback, and housing foreclosures, which were very high. Are those the same kinds of things we're seeing in other place, where maybe the hole is bigger than what Arnold Schwarzenegger would light a cigar with?

SUSAN URAHN: Well, they are. And I think if you look at Michigan, Michigan has the auto industry. And it has suffered for several years from -- from the implosion of that sector of the economy. I think, if you look at the 10 states that we looked at in this report, California and the nine others, together, they make up about a third of the economy. So, I think it is -- it is -- it is incredibly important to understand, while Nevada may not be a big state, Wisconsin may not be a big state, Rhode Island is not a big state, but you put them all together, and they -- they are a big part of this economy. And I think, also, what we're seeing on the national scene is -- is encouraging news about the national economy beginning to turn the corner.

GWEN IFILL: Right.

SUSAN URAHN: I think what's important to remember is that states tend to lag in recoveries. So, states were stressed out last year. They closed, I think, nearly a $180 billion cumulative budget gap. They're going to be facing nearly that large a budget gap again this year. There's still high unemployment. That means that state revenues from -- from taxes is going to be down. It means that the pressure to provide services is going to be up more, more Medicaid, more unemployment. So, states are -- are not turning the corner in terms of the recession.

Turning to the federal government

GWEN IFILL: Is this something that states then turn to the federal government? We saw a couple of big state governors in Washington a couple of weeks ago thanking Joe Biden for the stimulus money and hoping for more. Did that help? And is there more?

SUSAN URAHN: Well, there's no question that it helped cushion the -- the blow of the recession during this fiscal year. I think that -- that what the federal government is going to being asking is really two broad questions. The first show is, how bad is it out there? This is part of the answer to that. And the second is, do the states have the capacity to fix this problem on their own? The stimulus money is going to run out this year. I think there's a lot of uncertainty about whether states can make the cuts, raise the revenue and close those budget gaps. And, if they do, what's the impact on the national recovery?

GWEN IFILL: So, Jon, in Nevada -- let's -- let's boil this down what a state could actually do in a situation like this. As you point out, you have this 24-month budgeting problem. You have this gap. You have this idea that perhaps unemployment is not going to necessarily get better, because the two main industries aren't getting better, and Medicaid rolls are presumably going up, education is still a big -- how -- what steps are being taken to close all these gaps?

JON RALSTON: And then that's the problem, Gwen. This is pointed out in the Pew report, too. It's not just the economic impediments. It's the political impediments. You have a governor here who is a Republican, who has terrible approval ratings. He's a "no new taxes." That is the extent of his philosophy. You have a Democratically controlled legislature. And they are doing now a tax study, a revenue study, to see how they can help fix this problem for good. And this is the fifth tax study or so that's been done in the last 50 years. They all show the same thing.

We need to broaden the tax base, get more revenue in. And, as the Pew report also points out, there are constitutional impediments to doing some things here. You know, the mining industry wrote the constitution back in 1864, so they have got some pretty good protections in there. The lawmakers now don't want to hurt the gaming industry, because it's hurting.

Where are you going to get the money from? You broaden the sales tax, maybe. You go to some other businesses, maybe, at a time when businesses are hurting? Again, a potential $2 billion or $3 billion budget gap, when the budget itself last time was only $6.9 billion, that's a big problem.

GWEN IFILL: It also seems like a vicious cycle, Susan, because, on one hand, in order to get more revenues, that's code for taxes. It's probably the only way states can get revenues. On the other hand, maybe assessing new taxes slows down the economy, at a time when people are struggling.

SUSAN URAHN: I think that's exactly right. And that's a lot of what the federal policy-makers are going to be thinking about when they are -- are determining whether a second stimulus is needed. And just to throw another factor of uncertainty into the -- into the equation, then we have health care reform, and whether or not that's going to affect the states, as -- as different decisions get made. So...

What's next?

GWEN IFILL: It certainly would affect it if it had -- to the extent that it would put more pressure on the states to bulk up those Medicaid rolls.

SUSAN URAHN: That's exactly right.

GWEN IFILL: So, how long before states like Nevada and others begin to bounce back? Is there a continuum? Is there light at -- anywhere at the end of the tunnel?

SUSAN URAHN: Well, I think states will come out of the recession, again, more slowly than we will see nationally, but we're really, I think, looking at two pretty tough years. And I think California is predicting, as I recall, a return to pre-recession-level revenues not until 2015. So, it could be a little bit of a long haul coming out of this for the states.

GWEN IFILL: Oh, for some states, we're talking five or six years?

SUSAN URAHN: Possibly.

GWEN IFILL: How about in Nevada? Is there actually a -- now that everyone knows there is a problem, is there a plan, Jon?

JON RALSTON: There isn't a plan -- or, maybe worse, there's too many different plans, and, even worse, of course, is that we're coming up on a campaign year now, Gwen. So, you're going to have all these legislators, when they're asked, and when the gubernatorial candidates are asked, "What's your plan?" what are they going to say? "Let's wait and see what this latest study shows before we have to tell you." So, there's -- there's really nothing out there on the table.

And the real problem -- and this is pointed out in the report, too -- is that the gimmicks that have been used in the past -- and this has been going on -- I have been writing about this for decades -- were used to balance the budget last time, including the stimulus money, which won't be there in 2011, when they meet again.

And they sunsetted a payroll and sales tax increase, so that will be gone. So, they will be essentially starting from scratch. And unless they talk about it next year, which will be very difficult to do during a campaign year, I'm not sanguine about what the solution is going to be.

GWEN IFILL: Jon Ralston, Sue Urahn, it sounds like it's going to get worse before it gets better. Thank you very much for helping us with it.

SUSAN URAHN: Thank you.

JON RALSTON: Absolutely.