States struggle in time for transformation

Bill Clements and Charley Shaw
Dolan Media Co.

World War II jolted the U.S. out of its last massive financial crisis. But with no global war to propel a recovery this time, states are scrambling to staunch the red ink splashing across their budget sheets.

In state after state, politicians and budget officers are dealing with dangerous declines in revenue that reach beyond the national recession, and not even the billions in federal stimulus money pumped into state governments is doing more than delaying the worst.

In fact, many states’ fiscal straits have reached uncharted waters: In Minnesota, officials are battling their first-ever decline in revenue from one two-year budget period to the next.

From fiscal year 2009 to fiscal year 2010, New York’s revenue crashed by nearly 34 percent.

In Arizona, one longtime lobbyist is predicting the state will drop into insolvency.

Such a dire prediction is no longer shocking.

As this conclusion from the National Conference of State Legislatures’ July 2009 report on state budgets puts it: “Without a doubt, lawmakers’ endurance to resolve extraordinary fiscal problems will be tested for years to come.”

In 2009, the year in which most state legislatures operated under the full burden of crushing revenue shortfalls, lawmakers fell back on the old expedients of raising taxes and-or ordering  departments to hack away at jobs, and therefore, services.

With the expedients used up long before revenues are likely to recover, many states are resorting to a familiar stalling tactic, appointing task forces to study governmental change.

Even when the U.S. rises out of the worst recession since the Great Depression, state governments will continue to see the red ink flow because their revenue increases usually lag behind national economic recoveries.

“The next 18 months to two years for states looks very bleak,” said Scott Pattison, executive director of the Washington, D.C.-based National Association of State Budget Officers.

Pattison is skeptical as well about prospects for a big post-recession economic bounce for states.

“What I keep hearing and I think there is a lot of truth to it … is the new normal is a level of revenue growth rate that is not quite as strong in the aggregate as it was in the late ’90s,” Pattison said.

In their current form, public pensions, education, public safety, health care and other services are financial obligations that will continue to beleaguer states. But the current budget emergency means states haven’t been able to deal with the long-term costs of such vital programs.

“They have basically been put on the back burner while states deal with the immediate problem that is staring them in the face,” said Sujit CanagaRetna, senior fiscal analyst for the Lexington, Ky.-based Council of State Governments.

The blame for at least some of the states’ fiscal difficulties is the decades-long transformation of the nation’s economy from manufacturing to services. Many states haven’t adapted their tax policies to capture revenue on services. At the same time, manufacturing has withered

“There is this leaky roof,” CanagaRetna said. “You’re putting a pan and hoping the pan will collect water when you really have to replace the roof.”

The challenge for state governments is to find innovative ways to replace the roof, to provide services and obtain the revenue to pay for those services in a radically changed environment, argued David Wyss, chief economist for Standard & Poor’s in New York City.

But politicians are the people making the spending decisions for state governments, and most of them avoid any conflict — such as pursuing fiscal reform — that could threaten their political careers.

The primary push for fiscal reform is coming from public-interest think tanks and nonprofit groups.

In February 2009, as the Democratic-controlled Minnesota Legislature was wrangling with Republican Gov. Tim Pawlenty over the budget crisis, five of Minnesota’s largest foundations contracted with the St. Paul-based Public Strategies Group to develop ideas for transforming Minnesota’s “financing and delivery of public services.”

The result was a report issued in March that suggested nine ideas, including focusing state spending on health outcomes rather than services, developing a regional approach to county human service delivery, and providing choice and competition in local governments to improve quality and costs.

And Minnesota’s foundations are not the only ones investigating state government transformation. The Pew Center on the States is starting a study of what six states wrestling with long-term, structural budget imbalances are doing to uncover transformative ideas.

One of the states is Arizona, which needs the push. So far, what move has the state, like a dozen or so others, made to deal with the worst fiscal crisis since the Great Depression?
It has convened a task force.

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