State and city budgets falling fast

The nation's economic downturn is now squeezing state and city budgets – a financial turn of events that is forcing many mayors and governors to join the growing group of people on their knees asking Congress for help.

The sense of urgency has increased because states have seen their revenue fall sharply over the past two weeks. One early estimate puts the states' mid-year budget gap at $24 billion, double the estimate from the end of last month.

If Congress does not act soon on a fiscal stimulus package, states are warning of plans to lay off librarians, cut healthcare services, and ask unions to forgo raises. Some mayors are cutting recreational basketball leagues and mothballing housing projects. It's gotten so tough, the mayor of Trenton, N.J., Douglas Palmer, has had to demote firemen.

"There are problems everywhere," says Iris Lav, deputy director of the Center on Budget and Policy Priorities in Washington.

"The Feds need to step in because it's extremely difficult."

Ms. Lav's group estimates 41 states have faced or are facing budget shortfalls. By 2010, she estimates state deficits could ultimately hit $100 billion, or 13 percent to 14 percent of state budgets.

"The Feds must help before there is devastation of those budgets," she says.

However, mayors and governors are aware the politics of federal fiscal stimulus might prevent them from getting help right away. "Waiting for fiscal stimulus from Washington is an iffy prospect," said Gov. David Paterson (D) of New York at a press conference Wednesday. "It may not happen this year, it may take a while for it to happen in the new administration."

Washington observers say Governor Paterson is wise not to expect a check in the mail to solve his budget gap, which amounts to $47 billion over the next four years.

"I may be wrong, but just writing a check is unlikely," says Stanley Collender, a budget expert and managing director at Qorvis Communications in Washington. "But, there will be some assistance for states in some form whether it be a loan guarantee or the government buying their paper."

If the states had their way, they would like Congress to give them help in four areas: help with the growing number of people applying for Medicaid, more funding for the rising unemployed, help with the growing number on food stamps, and an injection of funds to jump-start infrastructure projects that are ready to go.

"We're not asking for a stimulus package because it will fill budget gaps," says Michael Bird, federal affairs counsel of the National Conference of State Legislatures in Washington. "We think it will provide additional benefits for those most disadvantaged by the downturn and create economic activity through the infrastructure package."

The cities also have their wish lists for a $89.9 billion package geared towards jobs and infrastructure projects. "We are focused on the lame duck session of Congress next week," says Tom Cochran, executive director of the United States Conference of Mayors in Washington. "We are urging a down payment on a Main Street stimulus package."

Mr. Cochran argues that money should go directly to metro areas. "We know how to use the money immediately, we don't want it to get stuck in the state capitals," he says. Mr. Bird counters that the projects may "be done by the state but they are done in localities."

The mayor of Trenton, Douglas Palmer, ticks off projects he has had to mothball to help close a $20 million shortfall. He says he has a 46-unit housing project that just needs $500,000 for street engineering. There are new schools that could be jump-started. And, the city has blueprints to repair miles of roads. "Money should go directly to the cities on a project by project basis," he says.

He could also use money for salaries. He plans to lay off 70 municipal employees and won't fill 40 vacancies. "I've even had to demote firefighters," he says.

Public servants around the nation are beginning to feel the heat. Gov. Donald Carcieri (R) of Rhode Island, facing a $372 million gap in fiscal year 2009, has negotiated no pay raises for this year and changes in healthcare benefits, including higher co-pays. The governor meets with legislative leaders next week to look at more belt-tightening, says Amy Kempe, a spokeswoman.

Some states are beginning to look at tax hikes to fill the gap. According to news reports, they include Nevada, California, and Oregon.

However, governors are mostly trying to avoid raising taxes in a recession. "The governor does not believe it's smart policy to raise broad-based taxes in an economic downturn and does not believe in making the state more uncompetitive," says Ms. Kempe.

New York's Paterson, facing a $1.5 billion deficit this year, talked spending cuts instead. The governor pointed out New York increased spending between 1990 and 2007 by 130 percent. With Wall Street cutting jobs, state tax revenues are fading quickly. "We can't get around the fact we have to cut spending," he said.