States Struggle to Balance Budgets

Six years after the recession ended, many U.S. states are hard pressed to balance budgets because of a sluggish recovery and their own policy decisions. The fiscal fragility raises questions about how they will weather the next economic downturn.

A majority of states are making cuts, tapping reserves or facing shortfalls despite an improving national economy and stock markets at record levels, according to Standard & Poor's and the Nelson A. Rockefeller Institute of Government. State revenue hasn't rebounded to a prerecession peak adjusted for inflation, and other factors are putting pressure on budgets.

Alaska, Oklahoma and energy-producing states saw receipts fall with global oil prices. Kansas overestimated revenue after tax cuts, while New Jersey faces a shortfall thanks to unfunded pensions. Even some Republican governors have championed tax increases to avoid further diminishing services curtailed during the 18-month recession, the deepest downturn since the Great Depression.

“The extent of the weakness is really impressive,” said Donald Boyd, who tracks state finances at the Rockefeller Institute in Albany, New York. “There's a lot of pressure on governors and legislators.”

Thirty-two states faced budget gaps in fiscal 2015 or 2016 or both, according to an April 27 report by Standard & Poor's. The fiscal year ends June 30 in all but four states.

Spending on education, roads repair and other services is threatened. Some Kansas schools are closing early, while Alaska Governor Bill Walker on Monday threatened furloughing as many as 15,000 workers if lawmakers don't act on a $3 billion gap. Alabama Governor Robert Bentley has warned of impending cuts, including the closing of 15 of 22 state parks.

While the shortfalls don't pose immediate risks to credit quality, having so many now is “an early warning” about vulnerability when the next downturn hits, said Gabriel Petek, a credit analyst at Standard & Poor's in San Francisco.

“We don't see a lot of slack built into the state budgets,” Petek said. “They just don't have a lot of room for error.”

State governments have about half the reserves that they had before the recession, according to the Pew Charitable Trusts.

The struggles have led to credit downgrades during the past year in Kansas, New Jersey and Pennsylvania, and the outlook for Louisiana was lowered in February. Across all state and local public entities, credit upgrades outpaced downgrades in the fourth quarter for the first time since 2008, Moody's Investors Service said in a February report.

Sunny California

Not all states are struggling. California Governor Jerry Brown said last week that an expanding economy has allowed a boost in proposed spending next year to a record $115 billion.

Others, including Arizona, Missouri and North Carolina, saw an “April surprise” of higher-than-expected income taxes after federal and state levies were paid, according to the National Association of State Budget Officers in Washington. Most states can expect slow growth in the coming year, said Brian Sigritz, the group's director of fiscal studies.

Still, improvement in employment, consumer spending and revenue has grown more slowly than in previous recoveries, said Boyd of the Rockefeller Institute. A dozen states still haven't recovered all jobs lost since the start of the downturn in December 2007, he said.

Aggregate general-fund revenue and spending haven't rebounded to inflation-adjusted fiscal 2008 levels, according to a survey by the State Budget Officers released in December. Revenue of $748 billion for fiscal 2015 would have to be $15 billion higher to match real 2008 levels, the group said.

“The one word we have not used since the recession has been 'robust,'” said Arturo Perez, Fiscal Affairs Program director at the National Conference of State Legislatures in Denver. “That's left states vulnerable.”

While revenue growth has been sluggish, states have had to spend more on things such as Medicaid, Boyd said. Mounting pension shortfalls are also squeezing states including Illinois, New Jersey and Pennsylvania, he said.

The situation has become so bleak in some states that even Republican governors loath to raise taxes have proposed higher levies.

In Nevada, two-term Republican Governor Brian Sandoval has proposed $1.1 billion in new or continued taxes to pay for education and initiatives such as expanding full-day kindergarten.

He has said he has no choice with a shortfall caused by declining mining and gambling revenue, as well as a need to bolster an education system that has the worst high-school graduation rate in the U.S.

Alabama's Bentley, a two-term Republican, has proposed raising $541 million through taxes on cigarettes, car sales and other items to avoid deep cuts to essential services with a long-building budget funding shortfall of $700 million.

“We have a real crisis on our hands,” Bentley said at a meeting Saturday with members of the Alabama League of Municipalities, according to a release.

Bloomberg News

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