States in crisis: Embroiled in the worst budget battles since the Great Recession

  • This summer has brought one of the toughest rounds of annual state budget battles since the Great Recession.
  • Some 33 states reported lower revenues than initially projected in the latest fiscal year, the highest number of states to come up short since the recession blew a giant hole in state budgets in 2010, according to the National Association of State Budget Officers.
  • States are also bracing for the potential impact of new policies out of Washington that threaten to put great financial strain on their budgets.

Faced with tight revenues, tax-weary voters and uncertainty about the impact of federal tax and budget policies, lawmakers and governors are wrestling over what has become one of the toughest rounds of annual state budget battles since the Great Recession.

More than a week after the start of the traditional July 1 fiscal year, seven states are still operating without an approved budget.

In Connecticut, Rhode Island and Wisconsin, lawmakers have yet to resolve disagreements about how to close ongoing budget gaps in their states or fund new budget initiatives.

Legislatures in Massachusetts, Pennsylvania, Oregon and Michigan have approved their tax and spending plans, which are waiting for signature or veto in those states.

Lawmakers in a dozen states have called special sessions to resolve outstanding differences over the latest tax and spending plans.

In Illinois an epic political battle that left the state without a budget for three years — the longest any state has gone without a spending plan — came to close last week. The Illinois House voted to override Republican Gov. Bruce Rauner's veto of a $36 billion spending plan, including a $5 billion tax hike, that was approved by the Democratic-controlled legislature over the Fourth of July holiday weekend.

Despite the break in the political stalemate, Illinois faces a deep budget hole, due in part to the pile of unpaid bills after some payments were suspended during the impasse.

"Even with a budget, it's likely that Illinois' finances [will] remain strained and vulnerable to unanticipated economic stress," Standard and Poor's said in a recent credit report.

S&P has given Illinois debt a Triple B-minus rating, one notch above junk status.

In more than a dozen other states, budget deliberations came down to the wire this year. In Maine and New Jersey, political stalemate forced brief government shutdowns in those states. A brief closure of shore beaches touched off an outcry when Republican Gov. Chris Christie was spotted relaxing in a beach chair over the July 4th weekend.

Governors in Washington state and Alaska signed new budgets at the end of the month, just hours before deadlines that would have triggered partial government shutdowns.

Tax revenues drop

State budgets have become increasingly politicized in recent years, especially in states where control of the statehouse is divided. But several forces are at work making this year's budget process even more contentious than usual, according to analysts.

Though the U.S. economy recently entered its ninth year of recovery from the Great Recession, growth has been slowing and, with it, the growth in state revenues.

Some 33 states reported lower revenues than initially projected in the latest fiscal year, the highest number of states to come sup short since the recession decimated budgets in 2010, according to the National Association of State Budget Officers.

Connecticut and Pennsylvania are among the hardest hit, with lower-than-expected tax collections widening ongoing budget gaps and leading to disputes over how to close them. Wisconsin legislators are working to close a transportation funding shortfall.

Energy states, including Alaska, Louisiana, Oklahoma and Wyoming, have seen tax revenues dry up since oil prices crashed in 2014.

In 15 states tax revenues took a hit after lawmakers slashed income taxes, according to the Rockefeller Institute. The biggest drop came in Ohio after a 6.3 percent tax cut left the state with $1.1 billion less revenue in the latest fiscal year.

Illinois has seen its revenues drop for two years straight after a temporary tax hike expired in 2015.

The trickle-down effect

The revenue shortfalls have forced states to tighten spending. At least 23 states had already made midyear budget cuts, totaling nearly $5 billion, even before the budget battles began this month.

States are also bracing for the potential impact of new policies out of Washington that threaten to put great financial strain on their budgets.

One of those changes is within the Republican-proposed health-care reform bill, which aims to slash government spending on Medicaid coverage. (The current program, the Affordable Care Act, had originally been created for low-income families and was expanded in 32 states.)

Under current law, the federal government shares the cost with the states, which saw their Medicaid spending rise by a median 5.2 percent in fiscal 2017, according to the National Association of State Budget Officers. Medicaid spending is expected to rise by another 4.2 percent in fiscal 2018.

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But if approved, the latest Republican health-care bill would slash Medicaid funding under the current law by some $772 billion over 10 years, according to the Congressional Budget Office.

States are also proceeding even more cautiously than usual due to uncertainty about other possible changes in federal policy.

One of those involves tax reform, and the possible loss of the federal income-tax deduction for state and local taxes. That would increase the effective cost of those taxes to state residents.

States are also waiting for clearer signs about the prospects for increased federal spending on infrastructure, one of the few policies that has drawn bipartisan support in Congress. Despite that general agreement, there has been little progress on legislation to boost funding for state infrastructure projects.

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