So says Madison Powers at CQ Politics (“Recession Realities: Why The Worst is Yet to Come“, 11/26/08). What caught our eye was his projection of the future of state budgets.
At least 41 states face budget shortfalls. In some states, the percentage is quite large, at or above 10% in the hardest hit states. But the worst impact comes later. During the first year of any recession the inevitable decreases in tax revenues are partially offset by previous year surpluses and “rainy day” funds. Many of those funds never got replenished adequately from the last recession, in part because they had cope with the peak of unemployment well into their 2004 budgets.
Looking ahead, then, we have to prepare for the fact that the heaviest burdens on the states are still years out from now. Past experience also shows that even the richest states have been unable to make up for the losses on their own and, in the case of the 2001 recession, the federal government undertook bailout schemes totaling $20 billion. This time around, the combined mid-year shortfall for the 2009 fiscal year alone is well beyond that amount.
The important lesson for the federal government is that they need to prepare now for that bailout, and it is likely to cost less and avert a worsening recession if they deal with it now. The reason is straightforward. States can’t ride it lean times with deficit spending or engage in their own Keynesian pump-priming. Balanced budget provisions in their constitutions won’t let them. They have to choose between expenditure reductions or tax increases, and the latter is no real option.
He identifies education budgets as especially problematic.
To make matters worse, just as the federal government undertakes public works projects designed to create jobs and stimulate the economy, the states will be retrenching their public works programs, thereby making the size of the necessary federal government initiative that much larger. Federal policy makers might as well plan for that now as well.
Moreover, state and local property taxes always fall substantially in periods of economic recession. In many states, various taxes are enacted with specific purposes, such as school finance, rather than general revenue. The predictable consequence is that large budget reductions will disproportionately affect the very things most important for future economic development. The standard mechanisms for funding education are problematic in good times, but they are disastrously short-sighted during an economic downturn.
RTWT!