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State Budget Woes Worsen As Deadline Arrives

Gov. Arnold Schwarzenegger speaks on the status of the state budget at the California Center for the Arts on June 12, 2009 in Escondido, California.
David McNew
Gov. Arnold Schwarzenegger speaks on the status of the state budget at the California Center for the Arts on June 12, 2009 in Escondido, California.

States across the country got their 2010 fiscal years off to a bumpy start Wednesday, as some faced shutdowns with their budgets in limbo and others braced for deep cuts after passing bare-bones plans to deal with recession-driven revenue shortfalls.

California is on the brink of issuing IOUs instead of payments to vendors and state workers after Gov. Arnold Schwarzenegger and state lawmakers failed to strike a budget compromise Tuesday. Wednesday is the beginning of the fiscal year for most states.

As the new fiscal year kicks off, California's deficit is roughly $26 billion, according to the state's Finance Department. Schwarzenegger said he plans to declare a new state of fiscal emergency, launch another special session and propose additional program cuts. He has also said he'll sign an executive order forcing more than 200,000 state workers to take a third furlough day each month.

Meanwhile, the state's controller said he'll have to start issuing promissory notes, with the first batch going out to taxpayers awaiting refunds.

Brian Sigritz, of the National Association of State Budget Officers, said virtually every state in the country has been negatively affected by the recession, with the exception of North Dakota.

Sigritz said some states weren't able to get budgets passed, while others — including Ohio and Connecticut — have temporary plans or executive orders in place to get them through the beginning of the month.

"Forty-two states went back and cut their 2009 budgets after they passed them — that's the largest number we've ever seen. That number is likely to be higher in 2010, as revenues for states continue to come in lower than expectation," Sigritz said.

Most states have a balanced-budget requirement that mandates that the budget has to be balanced by the end of year. State coffers were emptied this year by falling personal income tax revenues, which make up a big portion of state income. In January-April 2009, personal income tax collections fell 26 percent, leaving many states to make budget cuts through the end of June, Sigritz said.

Sales taxes and corporate income taxes also have fallen.

In other state budget developments from around the country:

— Connecticut Gov. Jodi Rell signed an executive order Tuesday that will keep the state government running without a budget in place. Rell and lawmakers are trying to reach an agreement that will close a gap estimated at about $8.8 billion.

— In North Carolina, legislators missed the midnight deadline for passing a new budget, but they approved a spending bill to keep the government operating temporarily. Gov. Beverly Perdue signed the bill, which will fund state agencies at 85 percent of current levels.

— Efforts to come up with a budget broke down completely in Illinois, leaving the state with no plan to keep state agencies running or pay state workers. Gov. Pat Quinn said Tuesday that he would not pass a proposed budget that leaves a $9.2 billion funding gap and slashes services to the disabled, children and the elderly.

— Arizona lawmakers passed a budget with more than $600 million in cuts, rejecting a call form Gov. Jan Brewer for a temporary increase in the state's sales tax. Brewer and state lawmakers have been battling over the budget for two weeks, after the Legislature passed the plan and failed to send it to her for fear of a veto. Brewer has said she wouldn't approve the plan, but it was not immediately clear if she would make good on the threat. Arizona is among the states hardest hit by the home foreclosure crisis, leaving many municipalities facing shortfalls because of reduced property tax revenues.

— Indiana lawmakers passed a $27.8 billion, two-year budget Tuesday that was signed by Gov. Mitch Daniels less than four hours before the government would have shut down.

A report issued Monday by the Center on Budget and Policy Priorities, which researches and analyzes budget and tax policies, projected the total shortfall for 2010 would be $166 billion in 48 states. The group said the gap will exceed $350 billion through 2011.

"State policymakers face an increasingly challenging battle against an economy that is still getting weaker," said Nicholas Johnson, director of the center's State Fiscal Project. "There is no letup in sight when it comes to making hard choices."