Revenue wilted, states rely on cuts to meet budget

Reuters News
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Posted: Apr 18, 2012 4:03 PM
Revenue wilted, states rely on cuts to meet budget

(Reuters) - Trapped in a revenue wasteland, U.S. states have cut spending by $290 billion over the last five years, with the largest reductions coming this year, according to a think tank that tracks state fiscal conditions.

In fiscal 2012, which for most states began last July, cuts totaled $140 billion, "almost as much as the combined total for the previous four years," according to the Center on Budget and Policy Priorities.

The recession began at the end of 2007 but did not affect state revenue until 2008. When the downturn struck, states tapped reserves, relied on increased federal aid and raised taxes as they sought to close a total of $600 billion in budget gaps over five years. All states except Vermont must end their fiscal years with balanced budgets.

But most states favored axing spending. CBPP found in its quantification of recession-related budget measures that since 2008, states have enacted almost $3 in spending cuts for every $1 in new revenue.

"The lack of balance between revenue and spending was most pronounced in fiscal year 2012, as reserves dwindled, federal aid largely expired and states enacted even fewer tax and fee increases," according to CBPP.

Over the five-year period, spending cuts closed 45 percent of the total budget gaps. In fiscal 2012, they closed 76 percent. According to CBPP, states had to close $169.3 billion in budget gaps for this fiscal year, the most out of the five-year period.

The cuts were so severe that 37 states this year will spend less than they did in 2008, before their revenue collapsed, when adjusted for inflation.

That could cause problems as more people turn to public services and the costs of providing those services, especially healthcare and education, continue to rise.

And while the revenue collapse appears over, many states fear that recent improvements will not be enough to restore their budgets to full health.

If revenue continues to grow at the same rate as 2011, when it rose 8.3 percent from the year before, "it would take seven years to get them back on a normal track," said CBPP.

Many states are in the midst of drafting or approving budgets for the next fiscal year and are already planning new reductions. On Tuesday, Florida Governor Rick Scott signed a budget with $143 million in spending cuts.

Tax and fee increases helped wipe out only 16 percent of the state budget gaps over the last five years, and the extraordinary assistance provided to states by federal stimulus accounted for 24 percent. Rainy day funds and reserves represented 9 percent, the group found.

The cuts could affect the national economy as it recovers from the longest and deepest downturn since the Great Depression, CBPP said, noting that state and local governments have shed 641,000 jobs since August 2008, and many plan on trimming their workforces further.

"The cuts have also led states to cancel contracts with vendors, reduce payments to businesses and non profits that provide services, and cut benefit payments to individuals — all steps that remove demand from the economy," it said.

More than half the 50 states cut higher education spending this year, and at least 20 states have "made identifiable, deep cuts in healthcare," CBPP said.

Arizona has frozen enrollment in the Medicaid health insurance program for the poor "so an estimated 100,000 low-income people who previously would have qualified will not be able to enter the program," it added.

At least 23 states cut spending on education for younger children this fiscal year, and Mississippi "will fail for the fourth year in a row" to fulfill a requirement to "ensure adequate funding in all school districts," CBPP said.

(Reporting By Lisa Lambert; Editing by Padraic Cassidy)