State Budget Challenges Catch Washington’s Attention

A year ago, most states hoped the economy would be strong enough this year that they wouldn’t have to cope with deficits like those of the past two years. Unfortunately, economic recovery has been weak and they face continued revenue shortfalls and the cessation of stimulus spending that sustained them through the recession. On February 3, National Governors Association Executive Director Ray Scheppach told the Senate Budget Committee that despite adopting $75 billion of spending cuts and $33 billion of tax increases over the past two years, the states will have to trim another $175 billion over the next few years. Today’s Washington Post has this handy chart and detailed article showing what mostly new governors from both parties are up against and what they’re proposing. Yesterday’s Center for Budget and Policy Priorities analysis adds a lot more.

Last November, the market hammered municipal bonds when these fiscal challenges became apparent and when Congress chose to end the Build America Bond Program. Ever since, there has been talk of state bankruptcies and municipal defaults. Arkansas defaulted during the Depression and some states defaulted during the Civil War, but, as this Center for Budget and Policy Priorities analysis shows, these fears are exaggerated. Fed Chair Ben Bernanke downplayed default talk on January 7 before the Senate Budget Committee. This 60 Minutes interview with leading financial analyst Meredith Whitney on December 19 set off another selloff when she predicted 50 to 100 municipal defaults.

What’s Washington up to now regarding the states? My recent conversations with top Hill staff reveal an aversion to any more bailouts. Last December 2, Rep. Devin Nunes (R-CA) and House Budget Chair Paul Ryan (R-WI) introduced H.R.6484 to prevent any bailouts of states and to require them to disclose pension liabilities. Today, several news outlets are reporting President Obama will propose to raise unemployment taxes on behalf of the states starting in 2014 without increasing federal unemployment tax revenues by raising the current covered wage from $7,000, where it’s been since 1983, to $15,000 and by lowering the 6.2% federal tax rate commensurately. That would give the states nearly $100 billion through 2023. This is the kind of slick fiscal policy that staff stay up nights trying to think up. It has some attractive characteristics, but House Republicans won’t go along with any tax increase, even if Republican governors are begging them to adopt it. That will leave the states praying the economy improves.