Category Archives: Economy

Update on State Budget Gaps: FY 2009 & FY 2010

Source: National Conference of State Legislatures, February 6, 2009

From the press release:
The state fiscal situation is rapidly deteriorating, as starkly revealed in the National Conference of State Legislatures’ (NCSL) new report on state budget gaps. The figures for fiscal year (FY) 2009 and FY 2010 have moved from sobering to distressing.

The latest news on state budgets reveals the severity of the current situation. For both FY 2009 and FY 2010, more states are reporting budget problems and the size of the gaps has increased. Even though some states have taken corrective actions, the current FY 2009 gap still stands at $47.4 billion. This is on top of the $40.3 billion shortfall already closed for this fiscal year. Next year’s projected gap is staggering as well. As states prepare to craft their FY 2010 budgets, the imbalance is pegged at $84.3 billion, up from $64.7 billion in November.
See also:
NCSL’s interactive map on State Budget Gaps: FY 2009 & FY 2010

Report on the Economic Crisis: Initial Impact on Hospitals

Source: American Hospital Association, November 2008

With our nation’s economic troubles, fewer patients are seeking hospital care while at the same time a growing proportion of patients need help paying for care, according to the study, Report on the Economic Crisis: Initial Impact on Hospitals. This report is based on survey results from 736 hospitals and information from DATABANK, a web-based reporting system used in 30 states to track key hospital trends.
See also:
Full Survey Results
Press Release

Related stories:
Beyond Health Care: The Economic Contribution of Hospitals, January 2009 Update
Report on the Capital Crisis: Impact on Hospitals, January 2009
* PowerPoint version of the report
* Press Release
The Economic Downturn and Its Impact on Hospitals, TrendWatch, January 2009
* Chartpack

Advocating in a Tough Economy Toolkit

Source: American Library Association, February 2009

During tough economic times, people turn to libraries for their incredible array of free resources, from computers to books, DVDs and CDs, for help with a job hunt or health information. The average annual cost to the taxpayer for access to this wide range of resources is about $31, the cost of one hardcover book. In good times or bad, libraries are a great value!

Causes of the Financial Crisis

Source: Mark Jickling, Congressional Research Service, R40173, January 29, 2009

The current financial crisis began in August 2007, when financial stability replaced inflation as the Federal Reserve’s chief concern. The roots of the crisis go back much further, and there are various views on the fundamental causes.

It is generally accepted that credit standards in U.S. mortgage lending were relaxed in the early 2000s, and that rising rates of delinquency and foreclosures delivered a sharp shock to a range of U.S. financial institutions. Beyond that point of agreement, however, there are many questions that will be debated by policymakers and academics for decades.

Why did the financial shock from the housing market downturn prove so difficult to contain? Why did the tools the Fed used successfully to limit damage to the financial system from previous shocks (the Asian crises of 1997-1998, the stock market crashes of 1987 and 2000-2001, the junk bond debacle in 1989, the savings and loan crisis, 9/11, and so on) fail to work this time? If we accept that the origins are in the United States, why were so many financial systems around the world swept up in the panic?

To what extent were long-term developments in financial markets to blame for the instability? Derivatives markets, for example, were long described as a way to spread financial risk more efficiently, so that market participants could bear only those risks they understood. Did derivatives, and other risk management techniques, actually increase risk and instability under crisis conditions? Was there too much reliance on computer models of market performance? Did those models reflect only the post-WWII period, which may now come to be viewed not as a typical 60-year period, suitable for use as a baseline for financial forecasts, but rather as an unusually favorable period that may not recur?

Did government actions inadvertently create the conditions for crisis? Did regulators fail to use their authority to prevent excessive risk-taking, or was their jurisdiction too limited and/or compartmentalized?

While some may insist that there is a single cause, and thus a simple remedy, the sheer number of causal factors that have been identified tends to suggest that the current financial situation is not yet fully understood in its full complexity. This report consists of a table that summarizes very briefly some of the arguments for particular causes, presents equally brief rejoinders, and includes a reference or two for further reading. It will be updated as required by market developments.

Waning Economy Leaves Corrections Budgets Short

Source: Eric Shultz, On the Line, Vol. 32, No. 1, January 2009

As many economists have already stated, the economy is as weak as it has been in decades, and it does not appear as though it will get better any time soon. The financial and auto industries are not the only ones suffering. The effects are being felt all over the country, in almost every industry and seemingly within every organization. The public, private and nonprofit sectors all seem to be tightening their belts, cutting costs and looking for new ways to generate revenue.

States, counties and local governments are being forced to make difficult budget cuts for the new year. The American Correctional Association has attempted to quantify and summarize the effects these cuts will have on corrections by surveying the state departments of correction and juvenile justice. In December 2008, we asked each if they have to make cuts to their current fiscal year budget and, if so, by how much. If they had not, we asked if they expect to have to make future budget cuts. We also asked them to identify the specific areas of operations these cuts would affect, including new construction and/or renovations, staff positions, wages and benefits, travel, staff training, correctional industries, offender education, offender programs such as substance abuse treatment and reentry, and any other cuts. Click here to view the results of this survey.

Cutting State Aid Will Lead to a Longer and Deeper Recession

Source: Ethan Pollack, Economic Policy Institute, February 9, 2009

The Nelson-Collins amendment to the Senate stimulus bill strips effective stimulus provisions from the bill, such as investments in transportation, broadband, and law enforcement. The most concerning cut, however, is the $40 billion cut to state aid, which represents nearly 40% of the total cuts in the amendment. This cut in particular will reduce the bill’s effectiveness as an economic stimulus, condemn hundreds of thousands to unemployment, and help prolong the recession.

In a recession, tax revenues shrink. For state and local governments–which are required to balance their budgets each year–this means cutting spending, which has the perverse effect of making the recession even worse. In a severe recession, state spending cuts can be so drastic that they significantly threaten the federal government’s ability to staunch the economic bleeding at all.

See also:

A Step Forward, a Stumble Back – Parsing the Economic Stimulus and Recovery Legislation

Source: Center for American Progress, February 9, 2009

Update of State and Local Government Fiscal Pressures

Source: United States Government Accountability Office, GAO-09-320R, January 26, 2009

You asked us to provide information on (1) the fiscal pressures facing state and local governments and (2) principles to consider in determining how to effectively target and time temporary assistance to states, especially for Medicaid. This information is intended to inform ongoing congressional deliberations regarding fiscal relief to state and local governments as a component of an economic recovery initiative to respond to the current recession.

We have developed a model that enables us to simulate fiscal outcomes of the state and local sector in the aggregate for several decades into the future. The model is not designed to highlight the fiscal position of individual states. Rather, the model projects the level of aggregate receipts and expenditures of the state and local sector in future years based on current and historical spending and revenue patterns. We first published the findings from our state and local fiscal model in 2007.1 A January 2008 report provided a detailed methodology for how we constructed the model.2 For a November 19, 2008, Senate Committee on Finance hearing, we provided a statement which included updated model results based on August 2008 National Income and Product Account (NIPA) data from the Bureau of Economic Analysis.3 The findings from the model discussed in this letter include data released in the Congressional Budget Office’s (CBO) Budget and Economic Outlook on January 8, 2009.

Addressing the Ongoing Crisis in the Housing and Financial Markets

Source: Douglas W. Elmendorf, Congressional Budget Office, Testimony before the
Committee on the Budget United States Senate, January 28, 2009

A strong financial sector is a necessary component of a robust economy. Financial markets and institutions channel funds from savers to borrowers who need the money to build businesses and hire workers and to buy homes and other goods and services. Indeed, credit is often required to support the ordinary operations of businesses–for example, to finance their inventories and to meet payrolls before payments are received. If the customary means of obtaining credit break down, the disruption to
households’ and businesses’ spending can be severe.

Thus, the ongoing crisis in the U.S. financial system has significantly depressed economic activity during the past year and a half, and it poses a serious threat to the nation’s ability to quickly return to a path of solid economic growth. Losses on mortgages, on assets backed by mortgages, and on other loans to consumers and businesses, together with an associated pullback from risk taking in many credit markets,
have raised the cost and reduced the availability of credit for borrowers whose credit ratings are less than the very highest. To be sure, among the fundamental causes of the crisis was the provision of too much credit at too low a price as well as insufficient capital. However, the sudden shift to a much higher price for risk taking has led to a significant reduction in wealth and borrowing capacity; it has also forced a number of financial institutions to close and others to be merged with stronger operations. Those forces, in turn, are weighing heavily on consumption, the demand for housing, and businesses’ investment.

Climate Impact of the Economic Stimulus Package: Preliminary Findings

Source: ICF International, January 29, 2009

ICF examined the sixteen key energy, environment, and technology provisions, as well as the major highway infrastructure provision of the Economic Stimulus Package proposal circulated to Congress on January 20th, 2009, and analyzed the potential greenhouse gas (GHG) impact of each provision. For some provisions, ICF was able to give quantitative estimates of the annual CO2 increases or reductions based on the amount of money proposed to be spent. For others, ICF developed scenarios to model the potential emissions impact based on how specific energy efficiency and renewable energy funds were spent. For provisions that focused on research and development, targeted tax credits, or funding for non-commercially ready technology, ICF provided qualitative insight as to the potential emissions impacts of these initiatives. The quantitative estimates are preliminary estimates based on limited data and reasonable but unconfirmed assumptions.

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