Report: Tough times far from over for states

PHOENIX – Lawmakers have reduced spending for parks, health care for low-income children and some state-funded medical transplants. Still, the tough times are far from over.

A report by the National Conference of State Legislatures to be released Wednesday says the fiscal crisis reshaping the level of services that government can deliver is likely to last at least another three years for many states.

The report did offer a glimmer of good news: State economies are improving, and so are tax revenues.

And yet, modest gains in tax revenue will not be enough to help most states' budgets in the coming fiscal year. And that means more pain for those who depend on state programs, from schools to public transportation.

"It just poses these excruciatingly difficult decisions," said Corina Eckl, the organization's director of fiscal programs.

The deepest economic downturn in 70 years, job losses and high home foreclosure rates have led to a sharp drop in tax revenue flowing to local and state governments, leaving agencies with spending commitments they can no longer afford.

So far, budget gaps totaling $26.7 billion are anticipated for 15 states, the report said. The other 35 states do not project a gap, so far, for their current budgets, NCSL said.

Last time around, states closed a cumulative $83.9 billion deficit. For many, it was their third or even fourth year of shortfalls.

States have been able to make up the shortfalls with a combination of federal aid, including stimulus funds, borrowing, selling assets, raiding special funds and cuts in such services as day care subsidies and police.

But opportunities to repeat those strategies are getting harder to find.

That prospect has some legislators, even Republicans, discussing tax increases.

"There's only so much you can cut before you get to what I call essential services that need to be provided by the state," said state Sen. Bill Raggio, a Reno, Nev., Republican whose 28-year tenure makes him the longest-serving legislator in state history.

Nevada, which leads the nation in unemployment, bankruptcies and foreclosures, is projected to have a shortfall between $1.1 billion and $3 billion, depending on what level of services that lawmakers want the state to provide.

They met in February in a special session to close an $800 million gap, in part, by draining reserve accounts and increasing fees, such as the cost for banks to file foreclosure paperwork with the state.

In addition to Nevada, states such as Illinois have projected shortfalls of more than 30 percent of their general funds.

Spending restraint has helped such states as Missouri avoid shortfalls in the current fiscal year, according to the report, based on the revenue and spending in every state and Puerto Rico.

States projecting shortfalls of 20 percent or greater in the 2012 fiscal years include New Jersey (26 percent) and North Carolina (20.3 percent), while Illinois' midyear gap in its current budget tops the list at a projected 47 percent of its general fund.

Illinois carried nearly $6.5 billion in unpaid bills into the fiscal year that began in July. The state's pension funds, which have nearly $80 billion in unfunded liabilities, are owed at least $3.7 billion this year.

Lawmakers are reluctant to cut spending or services, and the state's flat income tax rate hasn't been increased in 20 years.

"It's going to take cuts in areas that have not traditionally been cut — you can't do it with just an income tax increase — and then some strategic borrowing," Democrat Rep. Frank Mautino said.

"And we need help from the general economy, but that's not coming for another year or so," he said.

In Arizona, the state has a 9.7 percent shortfall projected in the current fiscal year and a 14.7 percent gap in the next one. The state has so far cut around the edges of public school funding by suspending aid for maintenance, halving funding for kindergarten and slashing money to buy of computers, textbooks and other equipment.

"It's never been anywhere close to the difficulty that we're apparently facing," said Chuck Essigs, a school finance expert for an Arizona association of school business officials.

Funding for some transplants through the state's Medicaid program ended Oct. 1 under a budget cut approved earlier this year. Gov. Jan Brewer said the state can't afford to maintain its current program and its previous services.

Democrat lawmakers on Tuesday called on Brewer to restore funding to the program.

"This "Brewercare" has set up real death panels here in Arizona and it is outrageous and disgusting," said Rep. Anna Tovar, who had bone marrow transplants in 2001 and 2002 to treat leukemia.

In California, the projected shortfall in the current fiscal year and the next one is expected to grow to $25.4 billion, equivalent to nearly 30 percent of the current $86.6 billion general spending plan.

California's 2009 cash shortage forced the state to issue IOUs, furlough tens of thousands of state workers and impose temporary tax increases. Service cuts included trimming health care for the poor. They also raided local government funds.

"Transforming California thoughtfully and responsibly will take longer than the 28 days Governor (Arnold) Schwarzenegger has left in office. Hasty action now could have devastating impacts," said Assemblyman Bob Blumenfield, chair of budget committee.

The report said most legislative budget directors say the revenue outlook in their states is stable, a turnaround from a year ago when just four provided that assessment. Meanwhile, directors in 17 states voiced concern, down from 30 a year ago.

Other states, especially those rich in natural resources, have weathered the recession reasonably well.

In West Virginia, for example, the revenue is 8.2 percent above projection, led by increased severance taxes on coal and other extracted natural resources . State officials also credit a multiyear effort to resist growth of the Medicaid program.

"In recent times, when the national economy was strong and revenues were up, West Virginia did not create new programs," said acting Gov. Earl Ray Tomblin. "We are able to continue to pay our bills, while keeping our budget stable."

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Associated Press writers Bob Christie in Phoenix, Lawrence Messina in Charleston, W.Va., Sandra Chereb in Carson City, Nev., John O'Connor in Springfield, Ill., and Judy Lin in Sacramento, Calif., contributed to this report.

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Online:

National Association of State Legislatures: http://www.ncsl.org