Tuesday, August 18, 2009

It’s Not Just Maryland

Maryland cannot seem to escape its budget nightmare. But as the Governor and the General Assembly struggle through a deficit yet again, voters should keep in mind that we are not alone.

The National Governors Association’s latest Fiscal Survey of States lays out the cratered moonscape of state finances. Here are some of its findings:

On spending:

So far, 42 states were forced to reduce enacted budgets in fiscal 2009 by $31.6 billion. This is in stark contrast to the thirteen states that had to reduce their enacted budgets in fiscal 2008 and the three states that reduced their enacted budgets during 2007. During the last fiscal downturn, the peak years of reductions to enacted budgets occurred in fiscal 2002 and fiscal 2003, when thirty-seven states were forced to make mid-year budget reductions totaling $14 billion and $12 billion, respectively. These years of peak cuts occurred after the national economic downturn ended in 2001.

Thirty-five states assume negative budget growth for fiscal 2010 governors’ recommended general fund budgets, while 30 states are estimating negative growth budgets for fiscal 2009.
The chart below shows that combined state budget increases are now in negative territory and are at their lowest level in at least 30 years. Maryland had nominal general fund changes of -0.9% in FY 2009 and -3.6% in FY 2010. The 50 states together had nominal general fund changes of -2.2% in FY 2009 and -2.5% in FY 2010.

On taxes:

Recommended net tax and fee changes would result in $23.9 billion in additional revenue based on governors’ recommended fiscal 2010 budgets. For fiscal 2010, 29 states recommend net increases while five states recommend net decreases. This amount well exceeds fiscal 2009, when states recommended $726 million tax and fee increases, as sixteen states recommended net decreases while eleven state recommended net increases.

The number of states experiencing revenue shortfalls increased in fiscal 2009. Revenues from all sources which include sales, personal income, corporate income and all other taxes and fees exceed expectations in two states, are on target in ten states, and are below expectations in thirty-eight states. This is in contrast to fiscal 2008 when twenty-five states reported that revenue collections exceeded estimates.
The chart below shows that combined state tax hikes in FY 2010 will reach a higher level that at any time since at least 1991. The Maryland General Assembly did not enact a net tax increase in FY 2010. The only revenue-raising measure it did enact was a cut in lottery sales agent commissions from 5.5% to 5.0% of ticket sales, which is projected to raise $8.6 million.

On year-end balances:

Total balances — ending balances and the amounts in budget stabilization “rainy day” funds — are a crucial tool that states heavily rely on during fiscal downturns and budget shortfalls. Balance levels are one of the indicators of overall state fiscal health.

After reaching a peak in fiscal 2006 at $69 billion or 11.5 percent of expenditures, balances declined in fiscal 2008 to 9.1 percent of expenditures. However, balance levels have fallen significantly during fiscal 2009, as balance level estimates now represent 5.5 percent of expenditures. Balance levels are projected to decrease to 5.3 percent of expenditures based on governors’ recommended fiscal 2010 budgets. While balance levels have fallen from their 2006 highs, they are expected to nearly match their historical average of 5.8 percent of expenditures. Because states recognize that an economic downturn may last for more than one year they are reluctant to deplete balances. This is in part due to concerns that the poor fiscal situation may continue through fiscal 2011.
The map below shows that many states’ rainy-day funds are in far worse condition than ours. Maryland’s year-end balance is projected to be 5.4% of expenditures in FY 2010, close to the 50-state combined balance of 5.3% and better than 29 states.

Here are the tax-hike and spending-cut strategies used by the 50 states in their FY 2010 budgets. We mark those strategies employed by Maryland with an asterisk (*).

Targeted cuts: 30*
Raise revenue (any type): 22*
Reduce local aid: 20*
Layoffs: 17*
Across the board cuts: 16*
Cuts to state employee benefits: 16
Reorganize agencies: 16
Furloughs: 15
Rainy-day fund: 15*
Raise tobacco taxes: 13
Raise motor vehicle-related fees: 12
Raise user fees: 11
Salary reductions: 10*
Raise business-related fees: 9
Raise higher education fees: 7
Raise court-related fees: 6
Raise sales taxes: 6
Raise personal income taxes: 5
Early retirement: 4
Raise alcohol taxes: 4
Gaming/gambling expansion: 2
Privatization: 2
Raise corporate income taxes: 2
Lottery expansion: 1
Other: 24*

So how are our elected leaders doing? Their challenge is probably less severe than many other parts of the country, especially in California, New York and Michigan. Since the 2007 special session, they have for the most part avoided revenue increases. Their strategy in FY 2010 is weighted towards restraining state employee compensation costs and budget cuts. More of both, as well as mounting cuts to local aid, is likely to come.