This fiscal outlook for states is grim, with 18 already facing billions of dollars in budget shortfalls and virtually all of them having to cope with an economic stimulus package that is likely to hit them with further revenue losses totaling nearly $2 billion, Arizona Gov. Janet Napolitano told the Senate Finance Committee yesterday.
During a committee hearing on the economic and fiscal conditions of the states that lasted about 20 minutes before being cut short so committee members could leave to vote, Napolitano said that as the economy slows, between 35 and 40 states will face "severe" budget cuts in 2009.
"We may only be at the beginning of the economic downturn, yet 18 states already face budget shortfalls totaling $14 billion in 2008, and 21 states project shortfalls totaling more than $32 billion in 2009," she said.
The stimulus package signed into law Feb. 13 did not help state budgets, she told the committee.
"Unfortunately, the recent federal stimulus package ... will result in a revenue loss to states of nearly $2 billion because of its impact on conforming state and local tax codes," she said in prepared testimony. "The principle of 'do no harm' requires that any additional stimulus package avoid policies that would diminish state revenues, shift costs from federal to state programs, or impose new unfunded mandates."
The revenue losses would result from accelerated depreciation, the main tax cut provided by the package, which will effect state as well as federal tax codes and reduce state tax collections, according to sources.
The Center on Budget and Policy Priorities said late last month that the business tax cuts might be even higher, causing states to lose at least $4 billion in state revenue.
Napolitano said the revenue losses will be particularly hard on the states because, "unlike the federal government, all but one state have balanced budget requirements; we cannot engage in deficit spending."
She told the committee that Congress should include in any new stimulus package, a temporary increase of $6 billion in Medicaid assistance, and another $6 billion in block grant money. The block grant funding would allow states to set priorities and avoid cuts to programs such as elementary education, health care and state programs assisting individuals to avoid defaults on home mortgages, she said.
Napolitano seemed to be more supportive of a pending second stimulus package, the Foreclosure Prevention Act of 2008, because it would focus on housing.
"Address what started [the economic slowdown]," Napolitano said. "Get housing moving again."
The proposed stimulus package would increase the private-activity bond volume cap by $10 billion and allow state and local housing finance agencies to use the extra capacity to issue bonds to refinance "qualified subprime loans." It would also provide $4 billion of community development block grant program funds that could be used by localities hurt most by foreclosures to purchase and refurbish or re-sell properties.
