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California Leads States Facing Deepening Budget Crises

July 1, 2009 at 6:00 PM EST
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Several states are struggling to find solutions for deep budget gaps as a new fiscal year begins. Jeffrey Brown examines the budget picture across the country.
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JIM LEHRER: Financial crises spread deeper at the state level today as most state governments began their new fiscal year. Some states were unable to pass budgets, while others voted on 11th-hour measures to stay afloat.

Jeffrey Brown, with PBS correspondents around the country, has our lead story report.

JEFFREY BROWN: Across the country, from one state legislature to another, today’s budget deadline brought boisterous debates over taxes, threats of spending cuts, painful choices made or delayed.

Some legislatures — Wisconsin’s, for example — reached last-minute agreements.

But elsewhere, the specter of government shutdowns and cutbacks loomed. States on the edge included: California, Illinois, Pennsylvania, Ohio, North Carolina, and Connecticut.

California, as always, led the way, though not in the direction it wanted, with a nearly $25 billion deficit and no agreement in sight.

This afternoon, Governor Arnold Schwarzenegger declared a “fiscal emergency” as the impasse continued between Senate Democrats and their Republican counterparts.

DARRELL STEINBERG (D), California state senator: The Republicans have said no new taxes. We have said we would not decimate the social safety net.

GOV. ARNOLD SCHWARZENEGGER (R), California: I think it is also important that they don’t send me a budget that has any tax increases in there, because I will also veto that.

JEFFREY BROWN: NewsHour correspondent Spencer Michels is in San Francisco.

SPENCER MICHELS, NewsHour correspondent: California cities like San Francisco are trying to figure out how to support the social safety net when most of the money for those programs comes from the state. And the state budget is in the worst shape it’s ever been.

The state controller intends to issue IOUs to help pay the state bills and for income tax refunds. At the same time, Wall Street is considering lowering its credit rating for California, a rating that is already very low, and that could have national implications.

There’s an ideological split between the Democrats and the Republicans in California that has contributed mightily to this crisis. The Republicans have vowed not to vote for any new taxes; the Democrats say they want some.

But both sides agree major cuts are necessary. Those cuts will hurt many state programs, including programs for the homeless, the poor, the disabled, and schools.

No one is exactly sure how to solve this problem. There may not be a solution. The one bright spot is that a state constitutional convention may be called to try to look into the budget problems, the systemic problems that have plagued this state for years.

Other states share budget woes

Susan Urahn
Pew Center on the States
In general, the energy-rich states are the ones that were the least affected by the recession, but even some of those, Texas and others, you know, struggled a little bit this year.

JEFFREY BROWN: In Illinois, there was also legislative stalemate today. Last night, union workers protesting cuts to programs blockaded the doors to the statehouse chamber. They demanded an increase in state income taxes, which help pay their salaries.

Governor Pat Quinn laid down this challenge to lawmakers last night.

GOV. PAT QUINN (D), Illinois: If this general assembly sends me a partial budget that decimates the social safety net of our state, I will veto that budget. So I'm prepared to stay here all summer to get the job done. I think that's what the people want. That's why we're here, to get the job done.

JEFFREY BROWN: Carol Marin of WWTW-Chicago's "Chicago Tonight" news program has more.

CAROL MARIN, WTTW "Chicago Tonight": Just hours ago, Illinois Governor Pat Quinn did exactly what he said he'd do. He inked a big black veto stamp onto the partial budget lawmakers sent him, and he continued to insist that a state income tax is the only fair and sensible way to close a $7 billion to $9 billion budget hole.

Tonight, Illinois has neither a solution nor the prospect of a solution to resolve this budget stalemate. And given that the new fiscal year began today, there's the real possibility of drastic cuts for veterans, seniors, and the disabled becoming a reality in the coming weeks.

The irony in all of this is that there's no Rod Blagojevich to blame for the dysfunction anymore. He's the Quinn predecessor whose impeachment, removal, and indictment made national headlines not long ago and whose wife just returned from the Costa Rican jungle after appearing in a network reality show to raise money for her husband's defense.

The further irony is that, in Illinois, whether with Blagojevich or Quinn, Democrats have for seven years controlled everything, the executive branch and the legislature. And so Illinoisans are left to worry why a clear political majority can't unite to save the state from going over a financial cliff. Lawmakers reconvene in two weeks.

JEFFREY BROWN: As the deadline loomed in North Carolina with no final agreement on a new budget, legislators passed an emergency stop-gap measure to keep the state government operating. Tax hikes and program cuts were again at stake.

From Raleigh, North Carolina, Eszter Vajda of UNC-TV has this report.

ESZTER VAJDA, UNC-TV: I'm standing in front of the Old State Capitol, where Governor Bev Perdue just held a press conference strongly urging lawmakers to hurry up and come to a budget agreement. The House and Senate approved legislation that continues government operating for another 15 days past the end of this fiscal year.

Now, the biggest point of contention is how to raise revenue, where to target that revenue. They agreed that there's a $4.5 billion shortfall; they just can't agree on what areas to tax. The bottom line here in North Carolina is that there will be some severe cuts in education, health and human services, and also justice and public safety.

LEGISLATOR: Thirty-four ayes, sixteen nays. The conference committee report has passed.

JEFFREY BROWN: Indiana was one state that managed to escape a shutdown, voting hours before a midnight deadline to approve a budget. Though here, as well, there was much pain involved.

Ann Shea of public station WTIU in Bloomington, Indiana, tells us what happened.

ANN SHEA, WTIU: In Indiana, the General Assembly approved a two-year budget, avoiding a government shutdown, before the midnight deadline. The final bill gives a statewide average of a 1.4 percent increase for K-12 public education. It spends $27.8 billion dollars in general state funds and about $1 billion in federal stimulus money.

House Minority Leader Republican Brian Bosma of Indianapolis says this puts Indiana in a better position than other states. Democrats who voted against the bill, though, are still concerned about the money going towards public education.

JEFFREY BROWN: In Arizona, too, negotiations came down to the wire with legislators eventually passing a budget in the early morning hours, but not without acrimony.

REBECCA RIOS (D), Arizona State Senator: This is a horrible budget. It has lots of bad public policy issues. So as Democrats, we absolutely cannot support this without decimating public education, child protective services, the elderly. The list goes on and on.

JOHN HUPPENTHAL (R), Arizona State Senator: I mean, we have -- $3.5 billion vanished, untold human suffering and misery there. We've got to deal with it. We haven't dealt with it aggressively enough. We don't have enough cuts in this budget, but it's what we can get.

JEFFREY BROWN: Republican Governor Jan Brewer today vetoed some budget items and called a special session to start Monday.

Budget gaps widen amid foreclosures

Susan Urahn
Pew Center on the States
The cumulative budget gap that states faced this year, walking into fiscal '10, they were looking at a total of about $160 billion. Walking into next year...they're already facing more than $100 billion in budget gaps.

JEFFREY BROWN: And to broaden our national picture more now, we're joined by Susan Urahn, managing director of the Pew Center on the States, a nonpartisan research group that tracks economic and budget issues at the state level.

Welcome to you.

We listened to all those reports, and we also have to remember that states were already making a lot of cuts, right, even before today?

SUSAN URAHN, Pew Center on the States: That's absolutely right. I think if you look back to fiscal year 2009, several states had budget gaps that they had to close. They were already dealing with the housing crisis, so states like Nevada, California, Arizona were fiscally stressed moving into fiscal year '10.

JEFFREY BROWN: So were the easy ones taken care of? Is that what we're seeing now?

SUSAN URAHN: Well, to the degree that any kind of cuts or tax increases are easy, they did that last year. So I think, moving into this year, it was really some of the very tough choices that they faced.

And moving into this year, the recession, which was very fast, very steep, had a terrifically bad effect on states. Forty-eight states came into this fiscal year with budget gaps, so the pain was wide and deep.

JEFFREY BROWN: Now, we just heard from five. You're saying it was wide and deep for 48 of these states. Are there regional pockets where it's worse?

SUSAN URAHN: Well, I think, you know, some of the states that are facing some of the biggest challenges -- and they are all across the country -- are the ones that were dealing with the foreclosure crises earlier. You've got states like Michigan that have been dealing with economic crises for, you know, economic challenges for, you know, several years now.

So I don't know if there are regional issues, but certainly there are states with severe problems all over the country.

JEFFREY BROWN: And you said 48 states, so now everybody's interested. Does that mean there are two that are OK? Which two?

SUSAN URAHN: Well, the two, Montana and North Dakota, came into the year with no budget gaps. And in general, the energy-rich states are the ones that were the least affected by the recession, but even some of those, Texas and others, you know, struggled a little bit this year.

Stimulus funds ameliorate problems

Susan Urahn
Pew Center on the States
Overall, the federal stimulus probably filled about 40 percent of the budget gaps that states had to deal with.

JEFFREY BROWN: How much is the federal stimulus program, federal dollars, how much is that helping it?

SUSAN URAHN: I think it was a critical piece of states' budgets this year. Overall, the federal stimulus probably filled about 40 percent of the budget gaps that states had to deal with. So without that, there would have been truly devastating cuts likely made in health and human services and education, and corrections, public safety. State government itself would have really faced some problems.

JEFFREY BROWN: And you would expect that more of that will be kicking in over the next month or year? States must be planning on that or no?

SUSAN URAHN: Well, I think, if you look at the budget gap, the cumulative budget gap that states faced this year, walking into fiscal '10, they were looking at a total of about $160 billion. Walking into next year, the next fiscal year, which started today, they're already facing more than $100 billion in budget gaps.

So they know that, even though they're going to close the budget gap in the next -- you know, in the -- you know, we've got just six states that are left to really sort this through in the next couple of weeks, hopefully. But once they do, they face the same problem all over again.

So fiscal year '11 is going to be a challenge. Fiscal year '12 is likely to be a challenge. So the tale of this recession for states is likely to stretch out certainly one, probably two, and possibly three years.

JEFFREY BROWN: Well, what happens right now? We just heard that report from North Carolina where they passed a stopgap measure, so they have, I think she said, 15 days, 14, 15 days. We heard other states where there's a total impasse. What happens in those states right now?

SUSAN URAHN: Well, they will continue to struggle with this until they sort it through. And in some states, they will start to feel pain, you know, probably not for the next week or so, but there are states that, when the state employee paychecks are due to come out in the middle of July, they may not be able to issue those checks.

California is already issuing IOUs to contractors and vendors. State workforces which have already faced, you know, hiring freezes -- that's the easy part -- wage cuts is a little bit tougher, furloughs, you know, may face government shutdowns. So I think the pain will start to be felt pretty soon, and it will get deeper and deeper until they settle these budgets.

Varied responses to the situation

Susan Urahn
Pew Center on the States
There are Republican governors that are proposing and have passed tax cuts, Mississippi, Rhode Island. And you also have in Arizona a Republican governor and a Republican legislature at an impasse over whether or not to increase taxes.

JEFFREY BROWN: And we heard our reporters around the country talk about the various ways that cuts will be felt, the various kind of programs. Does that jibe with what you're hearing countrywide, in terms of what areas and how citizens will feel the cuts?

SUSAN URAHN: Absolutely. And it's both -- it's cuts -- you know, health and human services -- services to vulnerable populations are going to be seriously affected, education, pre-K, K-12, higher ed, you know, devastating cuts in many states. And I think, you know, parks and recreation, corrections, you are seeing that all across the country.

But on the flip side, you're also seeing a fair amount of tax increases, because I think the debate in California -- which is really interesting, can you close that size of a budget gap with just cuts? What we have seen so far this year is more than half the states have put in place tax increases.

JEFFREY BROWN: More than half?

SUSAN URAHN: More than half. And a total of about $25 billion in tax increases have been passed so far. I mean, and likely more yet to come with these states as they struggle to settle their budget gaps.

So, you know, I think the tax increases are interesting, but also, even though it was portrayed in California as a partisan divide, you aren't seeing that necessarily across the country. There are Republican governors that are proposing and have passed tax cuts, Mississippi, Rhode Island. And you also have in Arizona a Republican governor and a Republican legislature at an impasse over whether or not to increase taxes.

JEFFREY BROWN: So it is cutting across some ideological barriers here?

SUSAN URAHN: It is. It absolutely is. I think what you're seeing is a real kind of scrambling of the partisan divide just because of the severity if you were to try to close -- as you try to close it with just cuts.

JEFFREY BROWN: Let me ask you one last thing. Do we look at states as lagging indicators? That is, if, in fact, the economy is getting better, when do states feel it?

SUSAN URAHN: Well, a lot of economists are predicting that this recession will officially end, you know, some time this year, which is terrific. But I think they're also predicting that unemployment is going to continue to rise well into 2010.

So because unemployment will continue to rise, state revenues from income taxes will continue to be down. We are looking at revenue dropping for at least the next year.

On top of that, as the population -- the vulnerable populations get stressed, they will take more advantage of state services, like Medicaid, like health services, which means that it will cost states more. So you've got a couple forces really working at odds at the state level.

JEFFREY BROWN: All right. Susan Urahn, thank you very much.

SUSAN URAHN: You're welcome.

JIM LEHRER: You can find more reports on the budget battles from our PBS colleagues in Ohio, Pennsylvania, and other states on our Web site.