$4.9M hole in budget for ’08

NEW YORK STATE — A sharp downturn in revenue, troubles on Wall Street and housing market woes are combining to make this year’s state budget process the most challenging since the recession earlier this decade.

New York faces a budget shortfall of $4.9 million, approximately 9.1 percent of its fiscal year 2008 general fund. This week Gov. David Paterson proposed cutting $800 million, or 2 percent, in agency spending in the next fiscal year.

“New York is facing a fiscal challenge we have not seen since the dark days following Sept. 11, and our state budget must reflect that reality,” he said.

New York isn’t alone.

Twenty-two states are facing budget shortfalls of at least $39 billion; six others expect budget problems, according to the Center on Budget and Policy Priorities in Washington. Most of these states are considering cuts in services.

Services face cuts

At least 17 states have made or proposed budget cuts that would cut services for residents. Many of these programs, according to the Center on Budget and Policy Priorities, serve the poor, elderly and disabled.

At least 10 states have proposed cuts that will affect low-income children’s or families’ eligibility for health insurance or reduce their access to health care services. Rhode Island, for example, has proposed eliminating health coverage for nearly 7,400 low-income parents. At least four states have proposed cuts to medical, rehabilitative, home care or other services needed by low-income people who are elderly or have disabilities. At least eight states have proposed cuts to K-12 education, and at least eight states have proposed cuts to public colleges and universities.

“States generally try to do one-time measures,” said Elizabeth McNichol, a senior fellow with the Center on Budget and Policy Priorities.

Closing the gap

Paterson’s proposed budget is $123.5 billion, down from the $124.3 billion proposed by former Gov. Eliot Spitzer in January.

Lawmakers have proposed different tactics for addressing the state’s budget shortfall. Assembly Speaker Sheldon Silver supports a temporary tax hike for people earning more than $1 million a year, while Assembly Minority Leader James Tedisco, R-Schenectady, has called for a hiring freeze to cut spending. Senate Majority Leader Joseph Bruno suggested that state resources such as lottery profits and cigarette tax proceeds could generate the needed money.

The cuts proposed by Paterson would trim aid to localities but do not affect education, health and welfare programs.

Many economists believe the country is headed into a recession, if it isn’t already in one.

States have several options during a fiscal crisis: They can cut spending, raise taxes or tap into a rainy day fund.

“Everything should be on the table, especially when you’ve got a problem as big as the one New York is facing,” McNichol said.

In a recent report, the Center on Budget and Policy Priorities notes, “In states facing budget gaps, the consequences could be severe — for residents as well as the economy. Unlike the federal government, states cannot run deficits when the economy turns down; they must cut expenditures, raise taxes or draw down reserve funds to balance their budgets.”

In the last recession, the report points out, states cut services such as health and education. Thirty-four states cut eligibility for public health programs, causing well more than 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or limited access to child care. Thirty-four states also cut per-pupil aid to school districts for K-12 education between 2002 and 2004.

Where will it come from?

McNichol said states will be looking to pass costs down to local governments, while local governments will be hoping for assistance from states. Now is the time, she said, for states to consider using their rainy day fund if they have one.

“If they have it, it makes sense,” she said. But “some states are waiting for more rain.”

The Fiscal Policy Institute in Latham supports raising taxes for the wealthy to generate more revenue and opposes cutting state services. Trudi Renwick, a senior economist at the FPI, said the need for public programs increases when the economy weakens because people lose their jobs, income and health benefits.

“Expenses go up when the economy turns down,” she said. “More people qualify for public assistance and Medicaid.”

New York is especially vulnerable to turmoil on Wall Street; between 2003 and 2007, half of the growth in New York’s personal income tax base came from capital gains and Wall Street wages.

“We’re even more reliant on Wall Street than in the past,” Renwick said. “That’s where the growth is.”

Studies show that the negative effects of a tax increase may be smaller than the negative effects of spending cuts because some of the tax increase will result in reduced saving rather than reduced consumption, she said.

Kajal Lahiri, an economics professor at the University at Albany, said he didn’t think raising taxes on the wealthy was a good idea.

“This is not the time to raise taxes,” he said. The wealthy, he said, “are the people who invest. They cannot consume [all their money]. Where is that money going to go? They’re going to invest it somewhere that brings in jobs.”

Lahiri said cutting state spending was the right approach. “Some cuts in planned expenditures are warranted,” he said.

Looking for relief

In the recession earlier this decade, the federal government, which can run a deficit, provided about $20 billion in fiscal relief to the states. There were two types of assistance: a temporary increase in the federal share of the Medicaid program and grants to states based on population. In 2003, New York received $2 billion from the federal government.

Renwick said states are hoping for another stimulus package. She said economists are still aren’t sure how bad this economic slowdown will be. “It’s so hard to tell,” she said. “Even as an economist, it’s hard to tell.”

Some, she said, have painted the downturn as the next Great Depression, but no one could say with any certainty whether things were that dire.

McNichol said this economic downturn may be worse than the one earlier this decade because it’s driven by the burst of the housing bubble.

“As housing values decrease, that can translate into lower revenues,” she said. “It doesn’t happen immediately, because they’re using an assessed value.”

Lahiri said he didn’t think the economic slowdown would be as bad as some were predicting.

“I don’t expect the slowdown to go very deep,” Lahiri said.

He said the Federal Reserve’s actions — last week, the Federal Reserve cut a key interest rate by three-quarters of a point — would help and that we would see the impact within the next several months.

“I’m not sure we will be in a recession,” Lahiri said. “I don’t foresee this being a big deal. People should not panic.”