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ECONOMIC WOES HIT STATES: Education Spending Cut as Recession Affects State and Local Budgets

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“The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like,” it reads. “Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.”

Earlier this month, the National Bureau of Economic Research confirmed that the United States has been in a recession since December 2007. In the last year, the U.S. economy has shed nearly two million jobs, the Dow Jones Industrial Average has lost more than one third of its value and, if that wasn’t enough, more than one million homes have been lost to foreclosure since August 2007.

The American public has seen firsthand the impact that these developments have had on individual retirement plans and the nation’s financial institutions, as well as on housing and the automobile industry. Similarly, state and local budgets have felt the pinch. According to a publication released earlier this year by the Center on Budget and Policy Priorities (CBPP), twenty-nine states have already faced a combined shortfall of more than $48 billion in their budgets for fiscal year 2009, which began July 1, 2008 in most states.

“The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like,” it reads. “Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.”

Indeed, pressures on state budgets have only increased in recent months. Now, in a new publication, CBPP says that new budget gaps have opened up in at least thirty-seven states and the District of Columbia and total more than $31.2 billion. Looking ahead to fiscal year 2010, the report, which was released earlier this month, says that all but a “handful” of states will face shortfalls that are projected to total more than $100 billion.

A Sampling of States With Projected Fiscal Year (FY) 2010 Budget Gaps

State

Size of Gap

Percent of FY 2009 General Fund

Arizona

$2.2 billion

21.9%

California

$19.5 billion

19.3%

Florida

$5.6 billion

21.9%

Kansas

$959 million

15.0%

New York

$12.5 billion

22.2%

South Dakota

$32 million

2.7%

Virginia

$1.8 billion

10.6%

Wisconsin

$2.9 billion

20.5%

 

Unlike the federal government, most states’ constitutions do not allow them to run budget deficits. Therefore, states largely resort to several methods to close gaps between revenue and expenses—cutting spending, tapping reserves from “rainy day” funds, raising taxes, or some combination of the three. Already, at least ten states have enacted across-the-board budget cuts while another ten are considering them, according to the National Conference of State Legislatures. It adds that five states have tapped their rainy day funds and six others are examining that option.

Because education consumes nearly half of general fund spending in many states, it often is a necessary target for cuts.1 In fact, many of the nation’s governors have already cut spending on education as they struggle to contain budget deficits that are projected to represent up to 20 percent of the state’s general fund in some instances. (As a comparison, states devoted an average of 16.6 percent of their general fund for Medicaid spending in fiscal year 2007, according to the National Association of State Budget Officers.)

According to CBPP, at least sixteen states are cutting spending on K–12 and early education. For example, Florida, Georgia, and South Carolina have each cut school aid by an estimated $95 or more per pupil. Additionally, at least twenty-one states have made cuts in postsecondary education that have resulted in reductions in faculty and staff, as well as in college tuition hikes of 5 to 15 percent in more than half of those states. In Rhode Island, students are facing midyear tuition hikes on top of increases that were enacted at the beginning of the academic year.

The CBPP report notes that expenditure cuts and tax increases are problematic policies during an economic downturn because they reduce overall demand and can further slow a state’s economy and contribute to the further slowing of the national economy as well. It adds that budget cuts are often deeper in the second year of a state fiscal crisis because reserves have been drawn down and are no longer an option for closing deficits.

For these reasons, the nation’s governors have asked for help from President-elect Barack Obama, who has said that he hopes to sign an economic recovery bill into law shortly after taking office on January 20. The exact size and scope of the planned package remains unknown, but estimates on its size continue to grow with each additional report of poor economic news. As Obama said on NBC’s Meet the Press on December 7, “We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving. Even with the country $1 trillion in debt, we can’t worry, short term, about the deficit.”

If aid to states is included in an economic recovery bill, it may be modeled after the assistance that the federal government provided to states during the last recession in 2001. At that time, the federal government provided $10 billion to states with no strings attached and an additional $10 billion to help with Medicaid costs.

State Budget Troubles Worsen” is available at http://www.cbpp.org/9-8-08sfp.htm.

Twenty-Nine States Faced Total Budget Shortfall of at Least $48 Billion in 2009” is available at http://www.cbpp.org/1-15-08sfp.pdf.

1) In most cases, a state’s general fund is its primary operating fund and is composed of revenues from direct general taxes paid by citizens and businesses. Money from this fund is used to cover the majority of state expenses, including elementary, secondary, and postsecondary education, Medicaid, corrections, transportation, economic development, and public health and safety. According to the National Association of State Budget Officers, elementary and secondary education made up an average of 34.4 percent of state spending within the general fund in fiscal year 2007 while higher education accounted for 11.2 percent.

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