With tax revenue still declining as a result of the recession and budget reserves largely drained, the vast majority of states have made spending cuts that hurt families and reduce necessary services. These cuts, in turn, have deepened states’ economic problems because families and businesses have less to spend. Federal recovery act dollars and funds raised from tax increases have greatly reduced the extent, severity, and economic impact of these cuts, but only to a point. And federal aid to states is slated to expire well before state revenues have recovered.
The cuts enacted in at least 46 states plus the District of Columbia since 2008 have occurred in all major areas of state services, including health care (31 states), services to the elderly and disabled (29 states and the District of Columbia), K-12 education (34 states and the District of Columbia), higher education (43 states), and other areas. States made these cuts because revenues from income taxes, sales taxes, and other revenue sources used to pay for these services declined due to the recession. At the same time, the need for these services did not decline and, in fact, rose as the number of families facing economic difficulties increased.
These budget pressures have not abated. Because unemployment rates remain high — and are projected to stay high well into next year — revenues are likely to remain at or near their current depressed levels. This has caused a new round of cuts. Based on gloomy revenue projections, legislatures and governors have enacted budgets for the 2011 fiscal year (which began on July 1, 2010 in most states). In many states these budgets contain cuts that go even further than those enacted over the past two fiscal years.
Cuts to state services not only harm vulnerable residents but also worsen the recession — and dampen the recovery — by reducing overall economic activity. When states cut spending, they lay off employees, cancel contracts with vendors, reduce payments to businesses and nonprofits that provide services, and cut benefit payments to individuals. All of these steps remove demand from the economy. For instance, at least 44 states and the District of Columbia have reduced overall wages paid to state workers by laying off workers, requiring them to take unpaid leave (furloughs), freezing new hires, or similar actions. State and local governments have eliminated over 400,000 jobs since August 2008, federal data show. Such measures are reducing not only the level and quality of services available to state residents but also the purchasing power of workers’ families, which in turn affects local businesses and slows recovery.
States are taking actions to mitigate the extent of these cuts. Since the recession began, over 30 states have addressed their budget shortfalls in part by increasing taxes. Like budget cuts, tax increases remove demand from the economy by reducing the amount of money people have to spend. But tax increases can be less detrimental to state economies than budget cuts because some of the tax increases affect upper-income households, so are likely to result in reduced saving rather than reduced consumption. Many more states will need to consider tax increases or other revenue measures, as well as such steps as tapping remaining state rainy day funds, as a way to minimize harmful budget cuts.
The cuts thus far in state-funded services — and the resulting harm to families’ well-being and to state economies — would have been much greater without federal assistance. The American Recovery and Reinvestment Act provided roughly $140 billion over two and a half years in the form of enhanced Medicaid funding and funding to pay for education, public safety and other services. In addition, H.R. 1586 — the August 2010 jobs bill — extended enhanced Medicaid funding through June 2011 and added $10 billion in additional education funding.
In some cases, it is possible to identify specific services that were slated for cuts but that have been protected in whole or in part by the federal funds; these include child care in Alabama and Arizona. public safety funding in Washington. prescription drugs for seniors and tuition assistance in New York. and education funding in a number of states. The Department of Education found that in an average quarter through June 30, the State Fiscal Stabilization Fund in the Recovery Act funded 266,000 education jobs and 49,000 jobs in other areas, for a total of 315,000 jobs.
In other cases, it is impossible to know what would have happened if states had not received the federal funds. But it is indisputable that families and communities would be facing much more serious consequences from state cuts.
Federal aid to states, however, is scheduled to expire well before state budgets have recovered. Additional funding for Medicaid is set to end at the end of June 2011, the close of most states’ 2011 fiscal year. States will have used up much of their additional federal funding for education at that point also. But the latest available data show state revenues still far below pre-recession levels, resulting in significant state budget shortfalls that will persist into fiscal year 2012 and beyond. Indeed, historical experience and current economic projections suggest that due to declining federal assistance, fiscal year 2012 will be a more difficult budget year for states than any year to date, meaning that state budget cuts could deepen even further, causing deeper private-sector and public-sector job loss.
One way to mitigate the need for additional state spending cuts and protect the economy would be for the federal government to reduce state budget gaps by extending enhanced Medicaid funds over the period that states are expected to experience budget problems rather than cutting enhanced funding off in June 2011. At the very least, the federal government should not take any actions that make states’ budget situations worse. Certain federal tax reductions, for example, could also reduce state revenues, exacerbating state budget problems and slowing the economic recovery. Cuts to federal “domestic discretionary” spending also would worsen state budget problems and lead to job loss, since a large share of that spending takes the form of grants to states.
Whatever actions the federal government takes, states
themselves can and should act to lessen the need for harmful cuts. They can do so by implementing a balanced approach to addressing their budget shortfalls, one that includes revenues rather than just ever deepening reductions in services.
Background: The Deep Recession Is Creating Widespread Deficits
The national recession is producing both declines in state and local revenues and increased need for public programs as residents lose jobs, income, and health insurance. In the 2009 and 2010 fiscal years, the imbalance between available revenues and what was needed for services opened up budget gaps in most states. In addition, states have now addressed significant budget shortfalls in enacting their 2011 budgets and even more budget gaps are projected for fiscal year 2012. Since the start of the recession, states have closed over $425 billion in budget shortfalls. Sizable budget gaps are likely to continue for the next several years.
Virtually all states are required to balance their operating budgets each year or biennium. Unlike the federal government, states cannot maintain services during an economic downturn by running a deficit. States had record reserves heading into this recession, but those have mostly been drawn down. Since federal economic assistance is slated to expire well before state budgets have recovered, states must address remaining shortfalls with a combination of spending cuts and/or tax increases.
Cuts Continue to Deepen, Affect Wide Range of Services
States began cutting their budgets in the spring of 2008, as the recession brought sharply weakened revenues. The cuts have intensified in the face of high and persistent unemployment. Even as the need for state-funded services rose, states cut funding for services by 4.2 percent for fiscal year 2009 and an additional 6.8 percent for 2010, according to estimates by the National Association of State Budget Officers (NASBO). NASBO projects that state spending for 2011 will remain 7.6 percent below 2008 levels. Indeed, the cuts that many states have enacted for FY2011 have been even more severe than those implemented in previous years. For example:
- An estimated 8,200 families in Arizona lost eligibility for temporary cash assistance as the time limit for that assistance is cut back to 36 months from 60.
- Colorado cut public school spending by $260 million, nearly a 5 percent decline from fiscal year 2010. The cut amounts to more than $400 per student.
- Florida’s 11 public universities raised tuition by 15 percent for the 2010-11 academic year. This tuition hike, combined with a similar increase in 2009-10, results in a total two-year increase of 32 percent.
- In Minnesota, as a result of higher education funding cuts, approximately 9,400 students lost their state financial aid grants entirely, and the remaining state financial aid recipients will see their grants cut by 19 percent.
- Virginia’s $700 million in K-12 education cuts for the current biennium include the state’s share of an array of school district operating and capital expenses, and funding for class-size reduction in Kindergarten through third grade.
- Washington will reduce assistance for thousands of people who are physically or mentally incapacitated and unable to work in early 2011. For 28,000 adults receiving cash grants through the state’s Disability Lifeline program, the typical monthly benefit will fall by $81 to $258 from $339.
These cuts are affecting a wide range of important services. Since the recession began:
- At least 31 states have implemented cuts that will restrict low-income children’s or families’ eligibility for health insurance or reduce their access to health care services.
- At least 29 states plus the District of Columbia are cutting medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or are significantly increasing the cost of these services.
- At least 34 states and the District of Columbia are cutting aid to K-12 schools and various education programs.
- At least 43 states have cut assistance to public colleges and universities, resulting in reductions in faculty and staff in addition to tuition increases.
- And at least 44 states and the District of Columbia have made cuts affecting state government employees.
Overall, at least 46 states plus the District of Columbia have made reductions in services. (These measures are discussed in greater detail in the Appendix)
The Role of Revenue Increases and Federal Aid
Several states facing large budget shortfalls have averted deep cuts in vital services by enacting temporary or permanent revenue increases.
- In late 2007 and 2008, some ten states enacted tax increases, closed loopholes, restricted tax credits, or implemented other revenue-raising measures. Major packages were enacted in Maryland, Michigan, and New York .
- Since the recession began, over 30 states have raised taxes, sometimes quite significantly. Increases have been enacted or are under consideration in personal income, business, sales, and excise taxes. Major state revenue packages have been enacted in California, Colorado, Connecticut, Delaware, Hawaii, Massachusetts, Nevada, New York, North Carolina, Washington and Wisconsin, among other states.
States also have used federal assistance to avert spending cuts. The American Recovery and Reinvestment Act, enacted in February 2009, gave states roughly $140 billion over a two-and-a-half year period to help fund ongoing programs, including enhanced funding for Medicaid and funding for K-12 and higher education. In August 2010, the federal government provided states an additional six months of enhanced Medicaid funding and an additional $10 billion in education funding. In state after state, it is abundantly clear that spending and service cuts in health care, education, human services, public safety, and other areas would have been much deeper had the federal funds not been available.  As noted above, however, federal fiscal relief will be largely exhausted by the end of states’ 2011 fiscal year, even though states are projecting substantial budget gaps for fiscal year 2012 and beyond. If the federal aid expires before state budgets have recovered, states will lose a critical tool for avoiding pro-cyclical actions such as budget cuts and tax increases that could slow the economic recovery even further. 
AT LEAST 46 STATES AND THE DISTRICT OF COLUMBIA HAVE CUT SERVICES