As the Economy Recovers, State Budgets Continue to Worsen

Present state budget crises will likely seem mild compared to what they will face in F Y2011. In order to comply with  their constitutionally mandated balanced budgets, many states relied on one-time gimmicks to pass their FY 2010 budgets and must now turn to even more drastic measures.

In California, Governor Schwarzenneger’s proposed solution to close a $19 billion dollar funding gap is to rely on $8 billion of hoped-for federal aid. This prediction was deemed overly optimistic by the state’s Legislative Analyst’s Office. However, that Gover Schwarzenneger is relying on federal funding at all should signal that the states’ “one-time” federal bailout last year has created a culture in which state legislators look to higher levels of government to fix their fiscal irresponsibility.

The current state budget problems exemplify the danger of fiscal gimmickry: one-time solutions allow states to pass their budgets when the crunch hits, but they create long run problems as the structural gaps between spending and revenue grow over time.

The Sacramento Bee reports:

LAO said that while there is a “good prospect” for receiving more money, “the chance that anywhere near all the federal funds and flexibility sought by the governor in his budget package is almost nonexistent. The state is very likely to fall several billion dollars short of the governor’s goals.”

After the state received stimulus money that helped close its budget gap in June, it asked for further bailout money as a budget gap opened. Planet Money explains that this experience did not teach lawmakers any lessons:

Last summer, state officials were turned down hard after going hat in hand to the White House, warning of a dire situation if the state’s budget hole wasn’t addressed soon.

This time, Sacramento isn’t using the b-word, instead calling any federal bailout a needed “investment.”

“No one is looking for a bailout. We’re looking for an investment,” said Senate President Pro Tem Darrell Steinberg, D-Sacramento, adding that the state needs to “fight” for more money.

On top of next year’s projected shortfall, California must deal with a $1 billion deficit from this year, caused by overly rosy projections of revenue and expenditure that budget makers employed last year to make the budget appear balanced. Even as they suffer the consequences for these practices, legislators continue to use gimmicks that will cause more problems in the future.

Arizona’s even more unusual approach is another example of taking extreme measures to balance a budget for the sake of passing it, rather than taking a long run view of the state’s economic health.