State spending battles go into overtime

  • Seven states start fiscal year without budgets
  • Weak revenue growth forces tight spending plans
  • Debt levels fall, but higher infrastructure repair costs loom

Faced with rising pension costs and weak revenue growth, Illinois lawmakers began the new fiscal year without a state budget as a bitter, long-running battle on the spending plan went into overtime.

The deadlock between the Democrat-controlled legislature and Republican Gov. Bruce Rauner could freeze state workers' paychecks if an agreement isn't reached soon.

Facing a union lawsuit to force those payments, state Attorney General Lisa Madigan said the Illinois Constitution bars the state from spending money—even to make payroll—and without a budget "even a court cannot order all of these payments to be made."

Read MoreState budget balancing is putting pensions at risk

Illinois isn't alone in failing to enact a state budget on time.

As of the July 1 budget deadline, Pennsylvania, Wisconsin and three other states had failed to pass a budget. The Wisconsin Legislature's finance committee, however, completed revisions to the state budget plan in early morning hours on Friday, clearing the way for a full vote by the Legislature.

North Carolina, New Hampshire and Massachusetts were only able to enact temporary spending plans before the fiscal year ran out. About a half dozen others approved budgets only at the last minute after contentious squabbling in extended sessions. (Alabama begins its fiscal year on Oct. 1.)

This year's annual fiscal battles have been complicated by a variety of local issues, but many states are wrestling with the same financial pressures. Budget balancing has grown increasingly difficult thanks to rising pension and health-care costs, relatively weak revenue growth and the ongoing aversion to any mention of a tax increase by voters and businesses.

While an improved economy has helped boost job growth, states have seen revenues recover much more slowly. Many are also feeling the effects of the end of federal stimulus spending, which helped fill in the revenue shortfall that followed the Great Recession. As a result many states have not seen revenues recovery to their prerecession levels, according to a state-by-state analysis by Pew Charitable Trusts.

That has forced some states to dip into reserves—also known as "rainy day funds"—to make up budget shortfalls. Connecticut ended its latest fiscal year some $116 million in the red, according to state officials, forcing Gov. Daniel Malloy to tap the state's $520 million reserve fund for the first time since 2011.

The fund has dwindled from its prerecession peak, according to Pew data, and now represents less than 11 days' worth of the Nutmeg State's two-year, $40 billion spending plan. The rebound in state revenues has varied widely in part due to regional economic conditions and the different mix of tax revenues each state relies on. States with strong job growth that lean heavily on incomes taxes, for example, have fared better than energy rich states that rely on production taxes.

With revenues weak and spending tight, many states have begun paring back debt—with the overall level of tax-supported state debt falling last year for the first time in the 28 years that data has been collected, according to Moody's Investors Service.

"The decrease comes as states continue to be reluctant to take on new debt with tight operating budgets, a slow economic recovery, and uncertainty over federal fiscal policy and health-care funding," Moody's analysts said. "With those factors, we expect debt levels to remain stable or even decline again in 2015."

Overall, state tax-supported debt fell last year by 1.2 percent to $509.6 billion. The total outstanding debt for all municipal bond debt issued by state and local governments amount to about $3.7 trillion.


Most states have taken advantage of low interest rates to issue new bonds to pay off older, higher-cost debt. That's helped lower overall borrowing.

But with many states facing looming bills to pay for aging roads, bridges and other infrastructure, borrowing levels will likely rise again soon, Moody's predicts.

In Wisconsin, Republican Gov. Scott Walker has proposed borrowing $1.3 billion to fix crumbling roads, but lawmakers have countered with a smaller amount. Malloy won small tax increases in Connecticut's new budget in part to help fund spending on road and other infrastructure repairs.