State Revenues, Deficits, and Bailouts in the Spotlight

The National Governors Association has issued the May 2009 edition of its State Economic Review newsletter, and the outlook for states hasn’t improved from the last edition.

While the national economy has begun to show some encouraging signs, such as the recent gains in the stock market and a rise in pending home sales, state revenues continue to falter. Historically, state revenues recover more slowly than the national economy as a whole. According to data released by the Rockefeller Institute of Government, state revenues declined by 4.0 percent in the fourth quarter, with personal income tax declining 1.1 percent and sales tax declining 6.1 percent.

Preliminary first quarter collections are even bleaker, with 42 states reporting estimated January and February declines of 12 percent. Unfortunately for states, early reports from April are not any more encouraging. During a recent conference call held by the National Association of State Budget Officers and the Federation of Tax Administrators, participating states reported that all sources of revenue are experiencing some form of decline, with estimated payments and final payments being the most significant. Numerous states reported that they are seeing declines of up to 40 percent in estimated payments. The stark declines in current revenues are forcing states from all regions to consider another round of budget cuts before fiscal 2009 concludes on June 30.

As I wrote here a few weeks ago, the latest state budget deficit projections—admittedly a moving target these days—are looking bleak for the next several years. According to the National Conference of State Legislatures’ April 2008 State Budget Update, 43 states have or are currently closing $62.4 billion in new fiscal year 2009 deficits materializing with the revenue crunch, and dozens are already projecting $121.2 billion in budget deficits for Fiscal Year 2010. The NCSL report has a few handy datapoints that help to put the ballooning state budget gaps in perspective:

  • FY 2008 (final): closed $12.8 billon cumulative deficit (19 states and Puerto Rico)
  • FY 2009 (pre-enactment, April 2008): closed $40.3 billion cumulative deficit (31 states and Puerto Rico)
  • FY 2009 (fiscal year underway, April 2009): additional $62.4 billion cumulative deficit (43 states and Puerto Rico)
  • FY 2010 (pre-enactment, April 2009): estimated $121.2 billion cumulative deficit (42 states and Puerto Rico)
  • FY 2011 (pre-enactment, April 2009): estimated $44.5 billion cumulative deficit (31 states and Puerto Rico; only 16 states reported preliminary estimates)

Given the ongoing decline in revenues plus the experience in Fiscal Year 2009—where states closed $40.3 billion in deficits before the beginning of the fiscal year and are now closing an additional $62.4 billion before it ends—you can expect large spikes in the FY 2010 and 2011 budget deficits over coming months.

With no end to the fiscal gloom in sight for profligate state and local spenders, D.C. policymakers can expect to hear increasing calls in the coming weeks and months for some sort of state and local bailout (btw, didn’t we already have one of those, called the American Recovery and Reinvestment Act?) Luckily, the idea (prompted by California’s grovelling) is not being met warmly by White House officials:

California needs to solve its financial crisis by itself and should not expect an emergency bailout from the White House, an array of Obama administration officials said Thursday, making clear they had no appetite to step in and provide financial assistance or loan guarantees.

“Look, we’re going to examine what we can do. What we need to do, however, is to treat states fairly and that means uniformly,” David Axelrod, senior advisor to the president, said in an interview. “Whatever we do for one state, there will be other states who also will want to do that. And there’s a limit to what the government can do.”

Axelrod indicated that federal intervention on California’s behalf would set a dangerous precedent. “There’s no doubt that there are states all over this country who have problems — not problems the size of California — but significant problems. And every governor in the country wants and needs assistance,” he said.

It is exceedingly rare for the federal government to help a state weather a short-term cash crisis such as the one California faces, administration officials said. Even if the president were to make an exception for California, the aid would need to come on unattractive terms so as not to send a message that distressed states can expect Washington to engineer a painless rescue. […]

Making a federal bailout even less appealing to the Obama administration is a sense that California has not yet tried all possible remedies. Raising taxes and cutting spending, for example, are steps that can still be taken by California officials to avert a financial meltdown, according to the Obama administration.

The administration seems to be on the right track thus far in its skepticism, and I’m sensing that even the bailout-happy White House understands that extending the “too big to fail” philosophy to fiscally irresponsible states would not only be terrible public policy, but also extremely politically unpopular as well.