Big Deficits In State Budgets

July 15, 2010

by Al Doyle

As many as 46 U.S. states are facing deficits in annual budgets, even though they are not permitted by law to spend more than the gross revenues received in any given year. The Institute for Truth in Accounting says 28 states are failing to disclose the full extent of the problem.

Aside from falling tax revenues caused by declining incomes, what are the other factors for this tidal wave of red ink? Many states work out budgets every other year, which means a good deal of estimating (and guessing) takes place when looking towards future revenues together with projected spending.

Government at all levels tends to be overly optimistic rather than objective when it comes to projecting how much cash will be on hand two years into the future, so the sharp decline in income tax and sales tax receipts was a rude reality check. Even Texas – often cited as one of the most recession-proof places in the U.S. – is facing a massive shortfall.

“We could have as a much as a $15 billion gap to fill,” according to former House Appropriations chairman Talmadge Heflin. His estimate is in the same general area as the Texas Taxpayers and Research Association’s prediction of a $13 billion deficit

Minnesota is staring at a $3 billion deficit, and the 2011 state budget which was supposed to be completed by May is still pending. Alabama is one of the few states that has come remotely close to slashing government spending. Nearly $297 million in funding for K-12 schools and $117.2 million for colleges was cut from the budget, and that will go a long way toward closing a $600 million shortfall.

Maine passed a two-year budget in March, but a 2011 deficit of $438 million looms large unless state spending is cut in a significant way. In Kansas, a $510 million deficit is expected in fiscal year 2011. Tax collections in April were 10 percent lower (or $65 million) than expectations. Rather than slashing bureaucratic bloat and waste, the state has responded by raising the sales tax from 5.3 to 6.3 percent.

Utah’s reputation as a conservative state doesn’t line up with an expected deficit of $700 million by the end of fiscal year 2010. State tax revenues are down 17.8 percent, and Utah governor Gary Herbert’s plea to cut spending by just $39 million is timid in the extreme.

Speaking of excess optimism, much of the projected revenues in state budgets are based on yet-to-be-received payments from federal stimulus funds and other fiscal promises made in Washington. How much can states realistically expect to receive from the most indebted nation in history?

Another major problem is the ever-growing pile of pension and medical care obligations to retirees who worked for various state and local government agencies. Many of these plans were underfunded, and politicians have shown no inclination or courage to cut these “Cadillac” level benefits.

Although California, Illinois, New York, and Nevada have gotten most of the media attention when it comes to unsustainable deficits, this escalating problem isn’t limited to a few states. What some observers call “Municide” is coming or has arrived at a state or city near you, and this financial crisis is growing by leaps and bounds.