Pew report: nine states join California in facing fiscal crisis

Ten states from Arizona to Oregon now face a fiscal crisis, says a Pew report. Some economists say additional stimulus is needed to soften the economic impact of impending state budget cuts.

By , Staff writer

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    Jan Bardin (r.) of Florida Power and Light speaks with US Air Force veteran Derrick Price of West Palm Beach, at a veterans job fair at Workforce Alliance in West Palm Beach, Florida, November 6.
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The "great recession" may be over, but its impact on state governments is still unfurling – and could threaten America's fragile economic recovery.

That message emerged in two assessments of the economy Wednesday.

The Pew Center on the States released a report concluding that nine states have joined California in a condition of "fiscal peril." Their budget troubles could cause a round of job cuts and tax hikes in states from Florida to Illinois and Oregon.

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In a separate news briefing Wednesday, Iris Lav, a fiscal policy expert at the Center on Budget and Policy Priorities, warned that state budget cuts could cost the economy 900,000 jobs in 2010.

"The problem is coming to a head now," Ms. Lav said. "State tax receipts are plummeting."

In her view, another round of federal aid to states is needed to fill a portion of their ongoing budget hole. States were major aid recipients under President Obama's stimulus package, the American Recovery and Reinvestment Act of 2009. That money will essentially run out at the end of next year, and states are already grappling with how to balance their budgets for the 2011 fiscal year, which covers the 12 months starting July 2010.

The question of more stimulus spending is controversial with voters, because the federal budget is already running a record deficit. But some economists say that spending modestly more on stimulus in 2010 could end up saving taxpayer money, by avoiding a relapse into recession.

"Without more help [for states], the resulting budget cuts will become a very significant drag on the economy," Mark Zandi, a forecaster at Moody's Economy.com, said during the same telephone briefing at which Lav spoke.

He called for additional stimulus efforts of $100 to $150 billion for the economy. Some of that would go the states and another portion would go to extend jobless benefits and a homebuyer tax credit. The latter has already been approved by Congress in a $40 billion measure. For comparison, the cost of the initial Recovery Act was $787 billion.

In the past six decades, state and local governments have never seen the kind of tax-revenue collapse they are now experiencing, Mr. Zandi said.

The study by the Pew Center, while not framed as a case for more federal stimulus, fleshed out the portrait of states in fiscal turmoil.

It identified 10 "most troubled" states, with California's budget woes already well publicized. The report is accompanied by a map of the whole country, showing which states are most or least like California.

The other nine in most trouble are: Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

These states face one or more of the following challenges:

Unbalanced economies. States that depend on a particular industry or two, such as automobiles or home construction, can be at greater risk in recession.

Budgets out of kilter. The recession puts almost all states in a bind, but California, Illinois, Michigan, New Jersey, Rhode Island, and Wisconsin have a history of persistent shortfalls, the study said.

Limited ability to act. In Arizona, California, Florida, Nevada and Oregon, the ability to raise taxes or cut spending is limited by their state constitutions, ballot measures passed by voters, or other legal impediments, the Pew researchers found.

Putting off decisions. The study said that lawmakers "punted" responsibility in California, Illinois, and New Jersey. They passed responsibility to state voters or governors to make tough calls, or used borrowing or accounting methods to put off tough budget decisions.

Across the nation, states will have to raise taxes or cut spending and jobs whether or not Washington provides additional stimulus. The case for stimulus, backers say, is that it may help minimize the chances that the economy will slip back into recession before private-sector job growth is moving again.

Some economists, however, argue that stimulus is either not needed or would be counterproductive, because it adds to the federal government's own fiscal burden.

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See also:

Post-Depression first: Americans get more money from government than they give back

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