Summary of Council of State Governments/Eastern Regional Conference Budget & Tax Chairs Committee conference call — January 22, 2009.  

Senator Lou D’Allesandro (NH), Chairman, Senate Finance Committee &Vice Chair, Senate Ways and Means Committee, moderated the discussion.   D’Allesandro noted that the purpose of the call was to: a) provide Budget and Tax Chairs in the region with an overview of the fiscal challenges facing states in the region and 2) discuss how they planned to meet those challenges.  The overall objective is to identify innovative state approaches to coping with current revenue shortfalls, which are affecting every state in the Eastern Region of CSG. 

Overview

“Given the complexity of budget projections, to the extent that the general fund revenue is tied into the business cycle, budgeters have to be very careful going forward, particularly if the downward trend continues,” D’Allesandro noted. The seven states represented on the call (as well as other states that were able to submit materials later) spoke of constantly shifting estimates and the difficulty of planning for their upcoming fiscal year(s) as a result. The greatest uncertainties shared by the ERC states were twofold: trying to project the recession’s impact on corporate and personal income tax revenue going forward; and assessing what portion of the federal stimulus plan would be directed toward states, and whether these funds would come with stipulations attached.

All of the states agreed that in the face of unprecedented challenges, any options—from agency consolidations to yearly gas tax increases—needed to be put on the table. As one budget officer observed, "like the rest of the country we're going through a period of economic hardship and we all need to work together. It's a bi-partisan effort to try to manage the damage."

The following is a state-by-state overview of budget and tax circumstances in the ERC member states. Not all call participants are listed.

CONNECTICUT

Geary Maher

Director, Office of Fiscal Analysis

Connecticut concludes the second year of its biennial budget in June. Maher announced that the state finished FY08 with a relatively modest surplus of $80M. Originally, his office had developed FY09 deficit projections of $392M on a total general fund base of $17B. His office is now revising its estimates for this and the coming fiscal years because of a precipitous decline in tax revenues in general, and capital gains tax revenues in particular.

Tax revenues overall were off 26% in November over the previous year, and the state anticipates a 46% decline in April. (Maher’s analysts expect a $600M decline in capital gains tax revenues alone come April filing season.)

Governor M. Jodi Rell currently anticipates a deficit of $922M deficit for FY09, even after recent deficit mitigation efforts, and deficits of $2.6B in FY10 and $3.2 in FY11. Rell’s budget is due Feb 4, and while she would prefer to close the gap without recourse to layoffs or tax increases, such a scenario seems increasingly unlikely. Maher expects some level of agency consolidation, and Rell has already begun negotiating with unions and looking for municipal aid reductions.

Connecticut does have access to $1.4B in its stabilization fund. Maher commented that the state had hoped to spread this amount out over the next biennium; however, it could be fully dissolved over the current fiscal year given the extraordinary challenges.

He also noted that the main difference between this fiscal crisis and the recession of 2000-01 was that the latter was somewhat contained by sector. Even though consumer confidence and spending were affected, at the time Wall Street and real estate were still strong. The all-encompassing quality and impact of this recession, however, “means there's a lot of reason for significant concern,” Maher said.

DELAWARE

Mike Morton

Office of Controller General

Morton discussed Delaware's projected $556M gap for FY10, on a total general fund of $3.3B. The state anticipates a deficit that could be as high as 20% of general operating accounts. Outgoing Governor Ruth Minner addressed $210M of that amount by raising taxes; the state also put a hiring freeze in place and made 7% staffing cuts across the board.

The remaining $109M deficit will need to be resolved by June. Tax revenues were down 7% for FY09 and projected to be down 13% for FY10. The state has $190M remaining in its rainy day account.

MASSACHUSETTS

David Sweeney

Budget Director, House Committee on Ways and Means

Sweeney noted that the state's total deficit this year is projected to be $2.4-2.5B; $1.2-1.3B of this amount has already been resolved through actions such as layoffs amounting to 1,000 FTEs. Massachusetts began the fiscal year with a $2.2B balance in its rainy day fund and expects to end the year at just under $1.7B. During the previous recession the state worked to build up its stabilization fund significantly; however in difficult times, Sweeney added, “it drains quickly as well.” The budget for FY10 is projected to have a gap of $3-$4 billion on a $28B base.

Governor Deval Patrick has proposed a slate of cuts, such as reducing payments to hospitals, but has yet to float any serious proposals to increase taxes. The state enjoyed a reduction in personal income taxes from 5.95 to 5.35% during the 1990s; according to Sweeney some external factions blame those cuts for the current predicament. As covered in CSG ERC's December Fiscal Notes http://www.csgeast.org/content.asp?pageID=324, Massachusetts saw a dramatic decline in its capital gains tax revenues this year and expects the situation to continue to worsen. Sweeney observed that thus far, Massachusetts residents and the state legislature have had little appetite for tax increases, although the shock of fully comprehending the current situation could change their stance.

On a side note, the Massachusetts Turnpike Authority is nearly insolvent after taking on Big Dig-related debt, though this is an off-budget issue. Remedies under consideration are a substantial gas tax hike and/or exponential toll increases; however, exhausting these options to resolve off-budget items eliminates their use in closing the state budget gap.

 NEW HAMPSHIRE

Lou D'Allesandro

State Senator

Although New Hampshire finished FY08 with a surplus carryover for FY09, it now looks like the 2009 budget has a $250M gap on a biennial budget base of $10.2B. Governor John Lynch has taken executive action to remediate $100M of this deficit through hiring and traveling freezes, a reduction in outpatient reimbursement in Medicaid and Medicare (despite significant pushback from hospitals), and placing holds on any non-vital functions and services. Legislators are considering a 5-cent gas tax increase over the next five years.

So far New Hampshire hasn't had to resort to layoffs, although a $75M gap still needs to be closed by fiscal year-end in June.  Business taxes for the state comprise 25% of the general fund, so the arrival of the March-April tax season will reveal the extent of damages to this revenue stream. D'Allesandro said the projected deficit for FY10 and FY11 is around $500M, despite the state's commitment to a $200M increase in education funding over the next biennium.

NEW JERSEY

David Rosen

Section Chief, Revenue, Finance and Appropriations Section

Governor Jon Corzine announced a $2B gap for FY09 on an overall budget base of $32B. Corzine’s plans contain $800M of current-year cuts, a $500M withdrawal from the state's various surplus funds, and a shift of $500M from what was intended to be a debt retirement fund. The forecast for FY10 of a $5B deficit, or 15% of total spending, looks similarly bleak.

In an unusual request, the Governor has asked for the budget deadline to be pushed back one month from mid-February; his request was granted and the legislature will need to wait until March 10th to get a close look at all of the proposed changes. While similar delays have been utilized when new governors come into office, the extraordinary fiscal pressures of the current climate prompted this departure from schedule.

New Jersey's legislature recently passed a toll road increase on a much smaller scale than Corzine's proposal last winter. Rosen was not aware of any further discussion around toll road privatization.

NEW YORK

Liz Kruger

State Senator

Kruger, though just two weeks into her new position as Vice Chair of the state’s Senate Finance Committee, spoke to New York’s dire situation. The state faces the biggest economic crisis in real dollars since the Great Depression, in large part because of its overdependence on the financial sector for tax revenues. With only two months left in FY09, New York will need to close a gap of $1.6B (or the equivalent of an annualized $10B cut). “Fairly shocking cuts” will be necessary, Kruger stated, with the hope that these changes will begin to address the towering $15B projected deficit for FY10 starting on April 1. (The upcoming gap is on what is currently a $120B budget.) After eliminating federal funds, the state will need to make a 20-22% cut of the budget. New York has a 1.2B rainy day reserve.

Confronting a 10% unemployment rate, the state has bankrupted its unemployment fund and borrowed from the federal government twice already this year. Governor David Paterson and the assembly are considering decreasing the number of state employees by 3,100 positions, hopefully without resorting to layoffs. Asked whether Albany is interested in raising payroll taxes to cover their borrowing, Kruger said the measure was under consideration “although it's not a good time to be raising taxes with so many people being laid off.”

Revenue proposals on the bargaining table include 88 new or increased taxes and fees, for example higher taxes on alcohol, cigarettes and gambling, higher fees to obtain drivers licenses and motor vehicle renewals, and a fairly substantial tax on utility bills (which would average a $10-20-dollar increase per household per month). State budgeters have located a few loophole closures in corporate tax policies. Yet even the sum total of these proposals would only yield $4.1B on the next fiscal year. “That doesn't get us where we need to be with a $15B gap,” Kruger observed.

Budget makers are also exploring radical 23-25% increases on transit fares, including looking at tolling bridges among the five NYC boroughs and Westchester and a new payroll tax on all employers to help cover some of the transportation expenses.

From a political perspective, Kruger noted that it would be interesting to follow the budget negotiations now that Democrats control both houses and the Governorship for the first time in 45 years.

PENNSYLVANIA

Paul Dlugolecki

“We were probably the last state in the Northeast to get into recession,” Dlugolecki acknowledged, “but now we're in with both feet.” Typically the legislature starts work in April on the budget, but the state couldn’t afford such a leisurely pace this year. Dlogolecki said that both members and staff have been grinding away since early January to try to pull a plan together by June 30.

Governor Edward Rendell just announced that his projection of the deficit has grown from $1.9 to 2.3B for this current fiscal year. Without any change in the state’s basic fiscal structure, whether through cuts or revenue enhancements, Dlugolecki said the projected deficit for FY10 will be $5.5B on an annual budget of 28B. So far Governor Rendell has proposed reductions of around $500M, underscoring his hopes that Pennsylvania will receive significant federal relief funds.

The state is also looking at ways to enhance revenue in order to bridge the gap.

Pennsylvania’s rainy day fund does have $725M in the balance; but as Dlugolecki observed, “it's one-time money that doesn't help in the long term if you have a structural deficit problem.”

Legislators waiting on gaming revenue as a solution will have to wait longer. Two planned casinos in Philadelphia haven't begun construction, and casinos in Pittsburgh and Bethlehem have yet to come online. The delays notwithstanding, however, the casinos are expected to have a minimal impact on general fund budget because profits go toward property tax relief and economic development.

The state highway funds are also short by about $38M. With a new administration in the White House, the Turnpike Authority is resubmitting its proposal to implement tolls on I-80. As in other states, Pennyslvania’s infrastructure is crumbling, with bridges in particularly bad repair. Dlugolecki estimated that $1-1.2B in annual revenue would be necessary to successfully remediate the damages. Although raising gas taxes remain an option, it would take a 7 or 8 cent increase to raise the additional revenue needed.

 General Discussion

Senator D’Allesandro:  Do people perceive that the downward trend will be as significant in the second half of the fiscal year as it's been for the first six months?

States that depend on the business sector, particularly as March and April approach, said they believed the next six months will in fact be worse. Senator Kruger of New York mentioned that the state’s controller does quarterly revenue projections and expects lower taxes for the foreseeable future. While personal income taxes take longer to reflect the recession’s full impact, New York expects those revenue to be lower as well.

Senator D’Allesandro: Does the difficulty of estimating revenue raise the possibility of going on a continuing resolution as states prepare next year's budget?

Pennsylvania mentioned speculation that the fiscal discussion may go on past the fiscal year. If budgeting continues into July or August they might require a stopgap, Dlugolecki mentioned. The viability of stopgaps seemed to be a political consideration that varied from state to state.

Chris Whatley, Stimulus Overview

CSG’s Washington Office director

Chris Whatley, CSG’s Washington Office director, said that each state did indeed have several “war stories” detailing their budget woes, but said that the federal governments’ proposed stimulus bill could ease some of their pain.

Whatley said that the three components of most value to the Northeast region’s fiscal crisis were increases to the Federal Medical Assistance Percentages (FMAP), as well as additional money for infrastructure projects and education funding.

“The FMAP side is by far and away the most valuable,” he said.

Federal Medical Assistance Percentages are used in determining the amount of federal matching funds for state expenditures for assistance payments for certain social services, and state medical and medical insurance expenditures.

The Social Security Act requires the Secretary of Health and Human Services to calculate and publish the FMAPs each year.

Whatley said that, under the U.S. Senate’s stimulus package, states would receive a blanket 5.6 percent increase in the federal governments’ share of Medicaid payments – but warned that the final FMAP increases could be reduced once the stimulus package reaches the president’s desk. “This is the most controversial element of the package right now,” he said.

He added: “I think it’s definitely in states’ interest to fight for as close the Senate amount as you can get.”

Whatley also said that the stimulus package contained about $9.5 billion in infrastructure money from the federal government, and released a chart detailing how much each state in the Northeast region, as well as Puerto Rico and the U.S. Virgin Islands, would receive under the bill.  He also released a preliminary analysis of potential FMAP increases for states.

Presentations:

• House FMAP State by State report, Center of Budget and Policy Priorities 
• ERC Infrastructure chart, Council of State Governments