Dire Warnings for States: 2011 Will be Painful

Tough decisions, unpopular initiatives and creative solutions—the strategies used by state officials to mitigate the effects of the recession—are as diverse as the states themselves. States big and small are facing the same problem: how to run the state business more efficiently, with less money.

According to Governor Schweitzer, there’s no such thing as ‘too big to fail’ or ‘too small to succeed’ when it comes to managing the state’s fiscal house.

“85 percent of Montana’s budget, as in every other state, is to educate, to medicate, to incarcerate,” he said.

“Every one of us runs the same business. We might be a little smaller shop than the big shop but we have to buy our goods and services the way they do, we have to sell them the same way they do. So just because you’re a Walmart, doesn’t mean that you’re not the same business as the ma-and-pa store down the road. We’re the ma and pa store that’s more efficient than Walmart.”

Whitney’s report on the states painted a bleaker picture of what could happen to these smaller states should the larger ones go under. In that case, state level-efficiency might not be enough to keep the states in the black, regardless of which state is at fault.

"Imagine you're conservative, fiscally sound Nebraska and you have to bail out California, or you're fiscally conservative Texas and now you have to bail out Michigan," she said. She added that, should this situation arise, the consequences on the dollar and the national recovery would be enormous.

In response to Whitney’s gloomy predictions, Bredesen said that, “You can’t say ‘states’ and talk about all 50 in the same words.” He said that he is more concerned with the enormity of the cuts made in each state, most of which are taking a toll on services that the states have historically provided, including education and healthcare.

Rather than forecasting state failure en masse, Bredesen said that the states’ problems will remain more individualistic: “There are states that are doing fine and have worked their way through these issues. There are states that could be basket cases in the first quarter of the year.” He said that as long as investors review cases on a state-by-state basis, instead of lumping them all together on the same category, “they’ll find great bargains there.”

For some, it’s not a question of hitting rock bottom, but how to climb out of the fiscal hole once they do.

Forty eight states addressed shortfalls in their fiscal year 2010 budgets, totaling $191 billion or 29 percent of state budgets—the largest gaps on record, according to a report by the Center on Budget and Policy Priorities.

Moving forward, the first quarter of the 2011 fiscal year will be a true test of how far the states have come in repairing their bruised economies.

"A lot of these states think Uncle Sam will be there just in case,” said Bredesen, suggesting that those states may learn the hard way that a federal safety net is no longer available.

“That’s the thing that’s going to be difficult to get through,” he added, saying that those states that haven’t made budget cuts—opting instead to fill their budgets with stimulus money —are going to be pressed for cash. “There’s going to be some dislocation,” he predicted. “You’re going to see some problems. “

For those states that have reached the nadir of their financial troubles, the only direction to proceed is up, despite the continued cuts and whatever federal assistance that might entail. “The economy is at least bottomed,” said Bredesen. “We can feel the bottom with our toes and it’s coming back.”

Governor Gregoire and her team of economic advisors remain cautiously realistic, if not optimistic.

“There’s not more bad news,” she said. “It’s just going to take us a while to get out of it.”