New budget year finds many states still scrambling

Some will need to make midyear cuts, beyond what they've sliced from their budgets already, say fiscal experts.

Rich Pedroncelli/AP
Facing a midnight deadline to avoid California from having to issue IOUs, Gov. Arnold Schwarzenegger held a news conference outside his Capitol office in Sacramento, Calif., Tuesday, in which he called on lawmakers to reach a solution to resolve the state's $24.3 billion budget deficit.

States across the US are in budget trouble, because the recession has caused tax revenues to plunge.

As many states rolled over into a new budget year Wednesday, nearly a dozen were scrambling to bridge gaps in their finances.

Indiana was among those that succeeded in their last-minute efforts. But some of the largest states – California, Illinois, Pennsylvania, and Ohio – were still grappling with fiscal emergencies as the calendar rolled into July.

As people and companies earn less, states collect less

Tax collections fell sharply during the 2009 fiscal year just ended on all fronts. Revenues from sales taxes were down 3.2 percent from 2008, from personal income taxes 6.6 percent, and from corporate tax payments 15.2 percent, according to estimates by the National Governors Association. That reflects the nature of the current recession, which has caused consumers to retrench, capital gains for investors to evaporate, and business profits to shrink.

In this tough climate, states have already taken major actions to cut spending or tap new revenue sources. But more measures are expected in the next year or two, because state budgets often feel the pinch of a recession even once the economy recovers.

The tax crunch for states became especially deep early this year, as Americans finalized their tax returns 2008, according to a June survey by the Nelson Rockefeller Institute of Government in Albany, N.Y.

"This [pattern] increases the risk that state budget agreements for 2009-10 will not close budget gaps completely, and that states will need to make midyear budget cuts," Lucy Dadayan and Donald Boyd said in the report.

Arizona, California, and Michigan – states that have been hard hit by the housing or automotive slumps – saw some of the biggest drops in tax revenue early this year.

Coping mechanisms

Some states have made across-the-board budget cuts in 2009. Georgia, Louisiana, and Massachusetts made cuts in all seven major program areas identified by the National Governors Association, for example. Higher education was the area cut by the most states (31), while transportation felt the budget ax in only 15 states.

Meanwhile, 23 states have moved to raise taxes in some way since January, according to the Center for Budget and Policy Priorities. Such moves are helping many states walk their fiscal tightropes.

But California may need to issue IOUs instead of paying bills. In Illinois and Pennsylvania, pushes to come up with a budget Tuesday were unsuccessful. The Ohio House voted for a seven-day spending plan that will allow the state to keep operating while budget talks continue.

Mississippi lawmakers approved most of the $6 billion budget, but left one agency – the state's utility regulatory agency – unfunded. Gov. Haley Barbour (R) has said he can run the agency by executive order.

In Connecticut, Gov. M. Jodi Rell (R) signed an executive order to keep the government running without a two-year budget in place.

Material from the Associated Press was used in this report.

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