U.S.Economy: State Budget Shortfalls May Cancel Out Bush Plan
By Siobhan Hughes
03/11 03:01
San Francisco, California, March 11 (Bloomberg) -- The biggest U.S. state budget shortfalls since World War II may force legislatures to raise taxes and cut spending by enough to neutralize the Bush administration's economic stimulus plan, economists said.
California is facing a record deficit of $34.6 billion; New York, $11.5 billion; and Texas, $9.9 billion over the next two years. Governors are firing workers, cutting back aid to schools and cities and raising fees and taxes. Such steps will probably total $80 billion to $100 billion, creating a drag on the economy about the same size as the boost President George W. Bush wants to provide by cutting federal taxes, economists said.
``We're set for a really negative impact on the U.S. economy,'' said Joseph Stiglitz, a Columbia University professor and a Nobel-prize winning economist. ``The states and localities are facing massive shortfalls.''
The budget deficits are occurring because revenue from personal, corporate and other taxes has dropped. Unemployment is close to an eight-year high of 6 percent, and the Standard & Poor's 500 Index has dropped three straight years, bringing the index down by almost half since March 2000. States also are contending with rising costs for Medicaid, double-digit health- insurance increases, and new federal requirements for spending on homeland security and education.
The shortfalls themselves place additional pressure on budgets because of credit downgrades. A rating cut last month by Moody's Investors Service left California's borrowing costs $4.8 million a year higher for each $1 billion in debt than a top rating would allow.
Standard & Poor's last year downgraded California, Kentucky, New Jersey and Wisconsin. It assigned ``negative'' outlooks to Connecticut, Indiana, Kansas, Maine, Ohio and Oregon, while removing ``positive'' outlooks from Illinois and Rhode Island. Fitch Ratings downgraded Oregon's debt last week.
Few Choices for Governors
The bond ratings of as many as 10 other states may be at risk, according to John Hallacy, managing director of municipal research at Merrill Lynch & Co. in New York. As they cut costs and raise taxes to cover their deficits, state governments will have to increase short-term borrowing to $90 billion this year from $78 billion in 2002, Hallacy said.
Governors have few choices in managing the deficits. Most states are legally required to balance their budgets. When revenue runs short, cutbacks or tax increases or both follow.
``Spending reductions and tax increases are direct drags on the national economy and will be a significant offset to stimulus coming from the federal government,'' said Kathleen Bostjancic, trading desk economist at Merrill Lynch, in a report last week. ``The fiscal drag at the state level is an added reason for our below-consensus GDP forecast of 2 percent in 2003.''
The most recent Blue Chip Economic Indicators survey of economists found a consensus forecast of 2.6 percent growth in the U.S. economy this year, up from 2.4 percent in 2002.
Wisconsin Job Cuts
``I'm one of the newer governors, and I've spent my first six weeks doing nothing but cutting budgets,'' Wisconsin Governor Jim Doyle said last month while in Washington to urge Bush to provide aid to states. At the end of February, the governor eliminated 2,900 jobs. He estimated the state's shortfall for the next two fiscal years at $3.2 billion.
State and local governments employ 18.7 million people, accounting for 14 percent of non-farm employment. In Wisconsin, where the average annual salary for civil servants is $39,527, the governor's cutbacks will take $114.6 million in wages out of the state's economy.
The National Conference of State Legislatures estimates that the states' budget deficits for the two fiscal years ending June 30, 2004, will total $94 billion. That includes $25.7 billion of deficits in the current fiscal year, and the shortfall may be higher because 11 states said they didn't have enough information to make an estimate.
Utah's Five Special Sessions
The organization said eight states have fired workers to cut costs and 24 are considering tax increases. The only states that aren't projecting shortfalls are Arkansas, Florida, New Mexico, North Dakota and Wyoming, the organization said. In 33 of the states, the deficits are 5 percent or more of the operating budgets. By Merrill Lynch's count, 29 states have made across-the- board spending cuts.
Virginia is cutting budgets 15 percent in almost all departments, said Jody Wagner, the state's treasurer. Nebraska may close a state college.
To write its fiscal 2003 budget, the Utah legislature held five special sessions, cutting $100 million in spending and putting through $300 million in one-time revenue-raising measures. For the fiscal year beginning July 1, Utah lawmakers last week adopted a spending plan that is $30 million smaller than the current one. ``There's not going to be some big snapback in the economy,'' said Ed Alter, the state's treasurer.
Companies will be hurt as state governments' budget cuts trickle down and squeeze localities. Brian O'Shaughnessy, chief executive officer of Revere Copper Products Inc. in Rome, New York, said orders were at a record low in February, down 20 percent from a year earlier. He said the slowdown mainly reflected waning demand from institutions, particularly schools and other government-financed construction. The maker of copper parts cut 60 jobs at the end of the month as a result.
No Help From Washington
Higher sales taxes reduce the amount of money people have to spend on other goods. Consumer spending accounts for two-thirds of the economy and has been the principal engine of the recovery.
``It's a big issue,'' J.C. Penney Co. Chief Executive Allen Questrom said last month. ``What changes my customer's lifestyle is the fact that she really lives day to day, so when she has a tax increase or she has a sales tax increase or a fuel tax increase, that's coming right out of her disposable income.''
States probably can't count on help from Washington, even though Maine Republican Senator Olympia Snowe and New York Democratic Senator Charles Schumer proposed legislation granting $40 billion to states and local governments so they can avoid raising taxes or cutting services as much. Federal Reserve Chairman Alan Greenspan and other government officials questioned the wisdom of such a step, and Bush didn't propose any aid.
``I don't think he's going to, but I think there is definitely pressure,'' said Gerald Cohen, a senior economist at Merrill Lynch. ``They don't want to reward deficits, because then states would know that they'd be bailed out.''
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