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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

State Fiscal Disasters

For all the talk about the impact of the financial crisis and the growing recession on the federal government’s balance sheet, the real nightmare is unfolding almost hourly in state capitals around the country.
Jennifer Steinhauer of The New York Times penned a brisk and depressing summary of state fiscal conditions yesterday. Basically, state revenues, whether based on income or sales taxes, are plunging, as demands for services rise and borrowing costs skyrocket. And most states were in bad shape even before the events of September, having already run through the easier ways to restrain spending, such as hiring freezes and travel bans.
California’s the real trendsetter for fiscal catastrophe. The state went through a protracted budget fight during the summer, with Gov. Arnold Schwarzenegger seeking huge layoffs and salary reductions for state employees before finally reaching a deal with legislators that aimed to close a $15 billion budget gap. Now there’s a new $11 billion budget shortfall, and the Golden State is in real danger of defaulting on its obligations.
Up until recently, states with large oil and gas reserves had been largely insulated from the torrent of red ink. Lower oil pricies may have been a “silver lining” in the recent economic disaster for the country as a whole, but they’ve also pushed oil-producing states into the same muck as their less resources-blessed counterparts.
All but one state (Vermont) has some sort of constitutional or statutory requirement to maintain balanced budgets. With credit tight, and resistance to tax increases very high, significant cuts in services are happening very rapidly. And with health care, education and infrastructure investments dominating state budgets, these three big priorities for the incoming Obama administration are being compromised at a dangerous pace. We may soon face the irony of a big brawling debate in Washington over universal health care coverage as the existing health care safety net is being shredded in the fifty states.
That’s why President-elect Obama, and most congressional leaders, have been making it clear that the next economic stimulus package will provide a significant level of state fiscal assistance. The simplest way to do that is through “super-matches” that at least temporarily raise the federal share of expenditures for federal-state programs ranging from Medicaid to bridge repairs. Emergency assistance to shore up unemployment insurance funds–even as eligibility is expanded to help people whose benefits have already run out–may be another “must-do.”
The political implications of the state fiscal crisis are hard to calculate, but could be profound. One of the least-discussed aspects of the “Clinton Boom” of the 1990s was how easy it made life for the host of Republican governors and state legislators elected in the 1994 landslide, who were often in a position to expand services while cutting taxes. It’s possible that the Bush administration’s parting gift to the GOP will be a national economic climate that makes life very difficult for the Democrats who now hold a majority of governorships and state legislative chambers.

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