AP analysis: States face long slog after recession

[June 14, 2011]  WASHINGTON (AP) -- At statehouses around the country, the Great Recession is far from over: It could take years for many states to climb out of the hole and return to pre-downturn spending levels.

An Associated Press examination of 50 balance sheets shows state budgets and bank accounts still ravaged by a drop in tax revenue. Many states are also facing enormous long-term pension and health care obligations. At the same time, the payout of stimulus money from Washington that helped many states in their darkest hours has come to an end.

While some states saw a modest jump in tax collections this spring, the combined revenue projected by the 50 states in the coming fiscal year -- $734 billion -- is still down by about $34 billion, or 5 percent, from the 2007-08 fiscal year, when the recession began.

Some states are in far worse shape. New Jersey, Nevada, Oregon, Illinois and Louisiana reported deficits that are more than 20 percent of the state general fund.

Even as many states begin a gradual recovery, analysts expect it will be several years before they are spending again at the levels seen before the recession.

In Georgia, for example, revenue has jumped by more than 8 percent from the previous fiscal year. But Republican Gov. Nathan Deal said he wants to use the bulk of the extra cash to replenish the state's depleted rainy day fund.

"My goal is to make sure we are on a firm financial footing," Deal said. "I think we need to be very, very cautious in our spending."

The AP collected a variety of budgetary and fiscal data from its statehouse bureaus across the country as part of a yearlong effort to examine the fiscal crises playing out across the country. The information was collected through early May and will be updated periodically throughout the year by AP's network of state government reporters, providing real-time information about state budgets and finances.

The data provides a detailed look at a moment in time when most states are struggling with deficits, spending cuts and long-term costs that threaten to restrict their spending for decades to come.

Some of the details:

• Twelve states started the year with deficits that were equal to 15 percent or more of their general fund, the budget that covers day-to-day operations.

• States with the highest per capita number of Medicaid recipients were among those with the largest budget deficits, as a percentage of general fund revenue.

• Twenty states enjoy general fund budgets that exceed their 2007 levels, while the remaining 30 states are still running behind.

• Tax revenue in Arizona, hit hard by the housing collapse, remains 19 percent below 2007 levels, the largest difference among the states. Next are California and Florida at 18 percent, and Michigan and Tennessee at 17 percent.

• The 50 states have a combined $689.5 billion in unfunded pension liabilities and $418 billion in retiree health care obligations. Five states have unfunded public employee pension liabilities of $50 billion or more.

David Wyss, chief economist at Standard & Poor's in New York, called the pension debt "the biggest headwind that the states will be fighting against" as they try to climb out of budget holes.

"It's worrying because it's such a widespread problem," he said.

States with big pension debts could be forced to pay more to borrow money.

Most state legislatures are facing a deadline to have a spending plan approved for the fiscal year that begins July 1. Spending cuts and shifting money from one account to another are the most common steps they are taking to balance their budgets.

Of particular concern to many states is the end this year of the federal government's stimulus program. The AP data show that states have accepted more than $316 billion in federal stimulus money, which has been poured into infrastructure projects, education and costly programs such as Medicaid.

In Arizona, which received a total of $6.4 billion in stimulus money, Gov. Jan Brewer and state lawmakers have approved a budget that erases a projected $1.1 billion shortfall with a nearly equal amount in spending cuts.

The biggest cut, a $500 million reduction in Medicaid, would implement a freeze to reduce enrollment by 240,000 within a year. The prospect for additional cuts looms as a temporary 1 cent sales tax increase approved by voters last year to help balance the books ends in 2013.

In some cases, states have taken steps that actually made their fiscal situation worse.

In Louisiana, for example, the drop in the state's general fund can be tied in part to hefty income tax breaks passed by lawmakers in 2007 and 2008 for middle- and upper-income earners. The permanent tax cuts drained an estimated $580 million the state would otherwise have received this year and similar amounts in future years.

Most states have resisted the temptation to raise taxes during the recession, but there are exceptions.

Then-Gov. Arnold Schwarzenegger agreed to temporary increases in California's personal income, sales and vehicle taxes in 2009. Gov. Jerry Brown, elected last fall, wants to renew those increases for up to five years to bring in more than $9 billion annually.

Since the recession began, New York's general fund has shot up $3.5 billion, or 7 percent, largely because of some of the biggest tax and spending increases in state history, including a $4 billion income tax hike on wealthier residents.

In Illinois, state revenue is 20 percent higher than in 2007 after income taxes were raised. The $6.8 billion that the increase is expected to generate will allow Illinois to avoid some cuts and spend money on neglected programs, particularly the state's underfunded pension funds.

Illinois state Rep. Frank Mautino, a Democrat, defended the tax increase as a way to help return the state to sound financial footing.

"The whole idea was to get ourselves balanced in four years because it took longer than four years to get ourselves unbalanced and in such a deep deficit," he said. "It will be very hard and very painful for a lot of people who depend on state services, but we can get to the point we need to be at."

[Associated Press; By SHANNON McCAFFREY and ERIK SCHELZIG]

McCaffrey reported from Atlanta and Schelzig reported from Nashville, Tenn. Associated Press writers Paul Davenport in Phoenix, Melinda Deslatte in Baton Rouge, La., Michael Gormley in Albany, N.Y., and Christopher Wills in Springfield, Ill., contributed to this report.

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