States Scramble for Funds in Crunch

ATLANTA -| If you thought state budgets were in bad shape last year, just wait: 2010 promises to be brutal for lawmakers — many facing re-election — as they scramble to find enough money to keep their states running without raising taxes.

Tax collections continue to sputter. Federal stimulus dollars are about to dry up. Rainy-day funds have been tapped. And demand for services — like Medicaid, food stamps and unemployment benefits — is soaring.

As lawmakers head back to state capitols this month, budget woes range "from bad to ridiculously bad," said David Wyss, chief economist at Standard & Poor's in New York. "There are some states, those hit particularly hard by the recession, that I don't think can cut spending enough. They're running out of things to cut."

Typically, the worst budget years for states are the two years after a recession ends. Across the nation, budgets are already lean after several rounds on the chopping block. And unless lawmakers increase taxes or fees — unpopular moves in an election year — most will need to cut even more as they grapple with the steepest decline of tax receipts on record. Services ranging from higher education to programs for the elderly could be in jeopardy.

The crunch could also mean new tolls to fund road projects, more prisoners being released early to trim corrections budgets, and the end of welfare programs that don't bring federal matching dollars.

In Oregon, voters go to the polls Jan. 26 to decide whether to uphold tax increases the legislature imposed on corporations and higher-income residents.

Scott Moore of the pro-tax group Vote Yes for Oregon said the $727 million tax increase package will protect schools and critical services while keeping the burden off middle-class families. But Pat McCormick of Oregonians Against Job-Killing Taxes argues the tax increases will cost the state private-sector jobs and keep it in recession.

Lawmakers in other states will be watching to see what happens, said Corina Eckl, fiscal policy director for the National Conference of State Legislatures.

"It really could be a bellwether for public tolerance," she said.

One possible rescue could come in the form of more stimulus money from Washington, but the prospects are uncertain. States last year were able to tap President Obama's economic stimulus package to soften the blow of budget cuts, mainly in education and health care, and some of that money is still left.

Politics are also at play. Twenty-two governorships are open in 2010, meaning incumbents on their way out the door could try to hand off the budget misery to their successors. Some are already signaling the pain ahead.

Washington Gov. Christine Gregoire has said she will propose a tax increase package to help close a $2.6 billion state budget deficit. In California, the new House speaker has said a mix of taxes and spending cuts will be needed fill another massive $21 billion budget deficit.

In New Jersey, incoming Gov. Chris Christie has promised not to raise taxes his first year in office despite a $9 billion shortfall. He's looking at budget cuts of up to 25 percent in state agencies.

And in Idaho, Republicans are pushing to cut individual and corporate taxes by more than one-third over the next decade, saying it would breathe life into the state's sputtering economy.

The Center on Budget and Policy Priorities offers a bleak forecast: State budget shortfalls are likely to reach a whopping $180 billion for the coming fiscal year, double the size of Texas' annual budget.

"It's going to be the toughest year yet," said Raymond Scheppach, director of the National Governors Association, who predicts funding could evaporate for higher education, the arts and economic development. "The states haven't hit bottom."

Mary Ann Neureiter, who runs an adult day care center in suburban Atlanta, saw her state aid cut in half in 2009. The Cambridge House Enrichment Center once offered state-subsidized care to 10 low-income clients with disabilities such as Alzheimer's. It's now down to three, and Miss Neureiter fears the funding could dry up altogether this year.

"It's heartbreaking because I foresee, in the coming year, it's going to get even worse for services for the elderly," she said.

States' budget problems are the result of plunging real estate values and home sales; unemployment, which is taking a toll on personal income tax collections; and plunging sales tax collections.

States had already closed a $146 billion gap when they put together their budgets for the current fiscal year. They were short by about 20 percent, with 36 states now reporting an additional shortfall of $28.2 billion for the fiscal year that ends in June, according to data compiled by the National Conference of State Legislatures.