State and local governments are “under-delivering” open and honest information about spending practices to the public, according to a survey released Wednesday by the Alexandria, Va.-based Association of Government Accountants (AGA). However, the survey found that respondents were most disappointed with the federal government’s financial reporting practices.
States are on the brink of their worst fiscal problems since the 2001 recession. At least half the states are anticipating budget shortfalls for next year (fiscal year 2009). For those states that have estimated the size of the gap, estimated deficits range from $34 billion to $38 billion in total. Among affected states, these deficits represent between 8 percent and 9 percent of total state expenditures.
The President’s 2009 budget would provide some $20.5 billion less for domestic discretionary programs outside of homeland security — a broad category of programs that includes everything from child care to environmental protection to medical research — than the 2008 level, adjusted for inflation.
The budget calls for reductions in a broad range of services, including some areas that have seen sizable cuts in recent years. For example, the budget would cut child care, environmental protection, and job training — all areas for which funding in 2008 is well below funding earlier in the decade, after adjusting for inflation.
Source: Daniel C. Vock, Stateline.org, February 15, 2008
Michigan just suspended a state loan program for 8,500 students, and the Port Authority of New York and New Jersey is facing a four-fold jump in interest rates on one of its loans. Both are signs of a new bond-market crisis that is threatening to hurt other cities and states if left unchecked.
Hopes are riding high that famed investor Warren Buffett, the administration of New York Gov. Eliot Spitzer (D), Congress or federal agencies will avert even bigger troubles.
If not, cities and states that issue tax-exempt bonds to raise money for such projects as road and bridge work or rely on investors to raise student-loan money could confront a series of new problems stemming from the subprime mortgage meltdown.
The federal “economic stimulus” package enacted today not only cuts federal taxes, but also threatens to reduce many states’ corporate and personal income tax revenue this year and next year.
The potential revenue loss comes at a particularly problematic time for states, because about half the states are already facing budget shortfalls for the current year, the upcoming year, or both; more states will be in trouble if the economic downturn worsens. Some states are already enacting cuts in K-12 education, higher education, health care and human services, among other areas in order to balance their budgets.
Over the last year, the Department of Health and Human Services (HHS) has issued a series of Medicaid regulations that could significantly affect health care at the state and local level. These regulations, most of which alter longstanding Medicaid policies, do not require congressional approval. In fact, in some cases Congress has expressly declined to enact the very same changes that HHS is now making through administrative action.
In addition, in December the Administration issued an interim final rule to implement a provision of the 2006 Deficit Reduction Act. The new rule goes well beyond Congress’s intent in that legislation, and does so in ways that will jeopardize access to essential health services.
Taken together, these regulatory changes will reduce federal Medicaid spending by close to $15 billion over the next five years. Most of these costs will simply be shifted to state and local governments, at a time when states have less capacity to absorb added costs given the economic slowdown and their weakening fiscal conditions.
State and local governments provide an array of services to their residents, such as primary and secondary education, libraries, police and fire services, social programs, roads and other infrastructure, public colleges and universities, and more. These subnational governments may face fiscal stress similar to the federal government. Given the nature of the partnership among levels of government in providing services to Americans and the economic interrelationships among levels of government, understanding potential future fiscal conditions of the state and local government sector is important for federal policymaking. To provide Congress and the public with this broader context, we developed a fiscal model of the state and local sector. This report describes this model and provides (1) simulations of the state and local government sector’s long-term fiscal outlook, (2) an analysis of the underlying causes of potential fiscal difficulties for the sector, (3) a discussion of the extent to which the long-term simulations are sensitive to alternative assumptions, and (4) an examination of how the state and local government sector could add to future federal fiscal challenges.
Grants to state and local governments have long been an important way in which the federal government supports and administers programs efficiently. The new budget, however, continues to significantly erode those grants. This leaves states and localities the option of either curtailing services or increasing their own taxes to compensate for declining federal funds. These cuts would come at a particularly difficult time, when many states already are cutting programs to balance their budgets and half of the states face budget gaps for the upcoming fiscal year of more than $34 billion.
Every state except Vermont operates under some sort of balanced budget requirement. That means that to serve the increased need of distressed populations during recessions, states must either increase revenue or reallocate resources dedicated to other programs. Similarly, when revenue declines, states must raise taxes or reallocate resources. This report examines the extent to which rainy day and general fund savings were a significant factor in helping states cope with fiscal stress during and after the 2001 recession, a possible explanation for the lower than expected legislated tax increases and social welfare cuts.
At least twenty-five states, including several of the nation’s largest, face budget shortfalls in fiscal year 2009. Of these 25 states, 19 have already made specific estimates; the combined deficits of these 19 states are expected to total at least $32 billion for fiscal 2009 — which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected. Many of the other states have not yet released information about their fiscal status.