gandalf grey

http://www.nytimes.com/2003/07/28/business/28ECON.html

July 28, 2003
Red Ink in States Beginning to Hurt Economic Recovery
By LOUIS UCHITELLE


Having already stripped the nation of a source of economic growth, the
budget crises in California and in almost every other state are now
beginning to drag down the national economy, prolonging the weak, jobless
recovery, the latest budget numbers show.

Over the past two years, the states have gradually cut between $20 billion
and $40 billion - no one knows exactly how much - from their spending.
Billions more in cutbacks are coming in the fiscal year that started July 1.
In California alone, a tentative budget deal will presumably require the
state to rid itself of at least $8 billion in current spending, with the
cuts likely to fall most heavily on education and aid to the poor.

The numbers are hard to add up, but even the most optimistic accounting has
state spending slowing sharply while tax rates rise along with a variety of
fees. Just three years ago, the states were still a plus for the economy.
While the private sector had begun to limp, state spending had remained
strong and so had revenues, despite cuts in tax rates in several states.

Today the opposite is happening, and that makes the states a net minus for
the national economy. Without that reversal, some economists say, the
economy would probably be growing at an annual rate of more than 3 percent,
enough to create jobs rather than eliminate them.

"It is reasonable to think that the response by the states to the fiscal
crisis is taking at least half a percentage point out of the growth rate of
the national economy," said Nicholas Johnson, director of the State Fiscal
Project at the Center on Budget and Policy Priorities in Washington. The
annual growth rate has averaged 2.6 percent for the last 15 months.

The cuts in state spending are just starting to be felt, with the impact
landing disproportionately on the poor. "We have been shifting a lot of
spending for social services from the feds to the states," said Robert M.
Solow, an economist at the Massachusetts Institute of Technology and a Nobel
laureate. "And that means the cuts that are taking place are hurting people
at the bottom of the income distribution."

That shows up clearly on the ground in California, which has cut spending by
$12 billion over the past two years, by far the largest cutback of any
state. At James Monroe High School in North Hills in the San Fernando
Valley, to take one of thousands of examples, state funding for a technician
to service the school's 900 computers disappeared, and state subsidies for
teacher aides also dried up, even though enrollment has jumped by nearly 20
percent, to 5,000, since 1998.

Child Support Services in Los Angeles County, which helps single parents
collect support payments from former spouses, also got hit, losing $10.6
million in state funds last April, or 7 percent of its budget. In response,
107 temporary employees were laid off, and 100 full-time workers were
notified that they could soon lose their jobs, although in the end only 32
will probably go, according to Philip Browning, the agency's director.

Across the state, tens of millions have been cut and continue to be cut from
funding for child care and job training, to computerize high schools, pay
performance bonuses to public school teachers, purchase library books for
elementary schools, subsidize research at state universities, and maintain
the value of assets in state employee pension plans. "The fewer deposits in
the pension plans mean your budget shortfall is less, but you can't do this
for very long," said G. Eugene Steuerle, a senior fellow at the Urban
Institute in Washington.

Medicaid outlays are still rising in California, but no longer by enough to
cover inflation or the growing number of poor people seeking care, although
as part of the Bush-sponsored tax cuts enacted in May, the states are
getting a $20 billion one-time infusion of federal money, with half of it
earmarked for Medicaid. California's share is $2.4 billion. "It is part of
the solution to the $38 billion ***ulative budget problem," said Brad
Williams, a senior economist at the California Legislative ****yst's Office.
"It helps a lot."

That huge deficit is far and away the largest ever ac***ulated by a state
and is a major issue in the recall vote that Gov. Gray Davis faces in
November. In the attempt to whittle down the deficit, $560 million came out
of state spending in California for kindergarten through 12th grade in the
last fiscal year, and more than $530 million disappeared from the $10
billion earmarked by the state for Medicaid, according to Jean Ross,
executive director of the California Budget Project, a research organization
in Sacramento.

The pain would be worse were it not for some budgetary sleight of hand
performed by a legion of state officials across the country. "Their bag of
tricks is impressively deep," Mr. Johnson said. "Take Illinois. The state
government has sold its big glass office building in downtown Chicago and
pocketed the sales revenue, but instead of moving out, it is renting back
the building."

Many state governments have been reluctant to lay off workers, preferring
instead to freeze hiring and wages and not replace workers who retire or
resign. Some states have raised tax rates to help cover salaries and thus
minimize layoffs. And a great variety of court fines and fees for service
have gone up. Minnesota even came up with a new one: public defenders are no
longer furnished free; defendants now pay $50 or more.

The resistance to layoffs has limited the drop in state employment across
the nation. Employment hit a peak of 5.023 million state workers in June of
last year and has fallen since then by 91,000, or less than 2 percent, the
Bureau of Labor Statistics reports. At the local government level,
employment finally stopped rising this year and flattened out at 13.8
million people, without falling.

The California experience is more extreme by far than what is happening in
the other states, but the maneuvering in California to avoid more outright
spending cuts is illustrative of maneuvering in state capitals everywhere.
In February, for example, the Davis administration sold for $2.5 billion
California's right to collect over the next 25 years a total of $5 billion
or more in tobacco settlement money. Roughly $30 billion of the $38 billion
deficit, in fact, is being dealt with through "borrowing, payment deferrals
and other one-time actions," Mr. Williams said.

Then there is the growing practice, evident in California and Minnesota,
among other states, of adopting optimistic forecasts of future economic
growth and assuming that tax revenues will rise as the forecasts
materialize. Minnesota, for example, is counting on the gross domestic
product to be growing by early fall at a 3.5 percent annual rate, not the
current 2.6 percent.

In still another maneuver, some states have reduced the spending that
appears on their books for a given fiscal year by delaying the payment of
June subsidies to school districts until July, the start of the next fiscal
year in most states. "What it means is that the school districts have to
borrow more money so they can get by in June," said William Marx, chief
fiscal ****yst for the Minnesota House of Representatives.

The states experienced a similar deficit problem in the early 1990's, during
the last recession-and-recovery period, but the amounts involved were much
less and the impact on the economy almost nil. This time, total spending by
the states, which nearly doubled over the decade to more than $1.1 trillion
a year, has slowed to a growth rate of barely 1 percent annually from an
average of nearly 7 percent in the 1990's.

The slowing has been in response to a sharp drop in state tax revenue, which
rose precipitously in the booming late 1990's, in part as a result of the
stock market bubble and the capital gains taxes collected on market profits.
As tax revenue rose, spending by the states also increased. So did each
state's rainy day reserves, even though many states cut taxes during the
good years. Now the reserves have been depleted, forcing the states to
increasingly cut back spending or find other ways to balance their budgets -
as every state except Vermont is required to do by law.

Because state tax collections are indirectly linked to those at the federal
level, the Bush administration's tax cuts have fed through to the states as
parallel cuts. But the hardest-hit states, California and Minnesota among
them, have been those with progressive income taxes, charging upper income
households at considerably higher rates than those at the low end. As
incomes have fallen, tax collections have fallen faster in these states than
in those without progressive tax rates.

Mr. Marx in Minnesota is counting on a rebound in the economy by early fall
to increase employment, incomes and tax collections. His projections of the
tax revenues that the state will collect in the current fiscal year rely on
the rebound occurring on schedule.

"We are optimistic in this projection," Mr. Marx said. "But the projection
is based on a forecast that was produced for us in February, and the rebound
has not happened yet."

Copyright 2003 The New York Times Company

--
--
FAIR USE NOTICE: This post contains copyrighted material the use of which
has not always been specifically authorized by the copyright owner. I am
making such material available in an effort to advance understanding of
environmental, political, human rights, economic, democracy, scientific, and
social justice issues, etc. I believe this constitutes a 'fair use' of any
such copyrighted material as provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107

"If this were a dictatorship, it'd be a heck of a lot easier, just so
long as I'm the dictator." - GW Bush 12/18/2000.

"To announce that there must be no criticism of the president, or that
we are to stand by the president right or wrong, is not only unpatriotic
and servile, but is morally treasonable to the American public."
---Theodore Roosevelt

"I think all foreigners should stop interfering in the internal affairs of
Iraq."
-- Deputy Defense Secretary Paul Wolfowitz,

gandalf grey

http://www.nytimes.com/2003/07/28/business/28ECON.html

July 28, 2003
Red Ink in States Beginning to Hurt Economic Recovery
By LOUIS UCHITELLE


Having already stripped the nation of a source of economic growth, the
budget crises in California and in almost every other state are now
beginning to drag down the national economy, prolonging the weak, jobless
recovery, the latest budget numbers show.

Over the past two years, the states have gradually cut between $20 billion
and $40 billion - no one knows exactly how much - from their spending.
Billions more in cutbacks are coming in the fiscal year that started July 1.
In California alone, a tentative budget deal will presumably require the
state to rid itself of at least $8 billion in current spending, with the
cuts likely to fall most heavily on education and aid to the poor.

The numbers are hard to add up, but even the most optimistic accounting has
state spending slowing sharply while tax rates rise along with a variety of
fees. Just three years ago, the states were still a plus for the economy.
While the private sector had begun to limp, state spending had remained
strong and so had revenues, despite cuts in tax rates in several states.

Today the opposite is happening, and that makes the states a net minus for
the national economy. Without that reversal, some economists say, the
economy would probably be growing at an annual rate of more than 3 percent,
enough to create jobs rather than eliminate them.

"It is reasonable to think that the response by the states to the fiscal
crisis is taking at least half a percentage point out of the growth rate of
the national economy," said Nicholas Johnson, director of the State Fiscal
Project at the Center on Budget and Policy Priorities in Washington. The
annual growth rate has averaged 2.6 percent for the last 15 months.

The cuts in state spending are just starting to be felt, with the impact
landing disproportionately on the poor. "We have been shifting a lot of
spending for social services from the feds to the states," said Robert M.
Solow, an economist at the Massachusetts Institute of Technology and a Nobel
laureate. "And that means the cuts that are taking place are hurting people
at the bottom of the income distribution."

That shows up clearly on the ground in California, which has cut spending by
$12 billion over the past two years, by far the largest cutback of any
state. At James Monroe High School in North Hills in the San Fernando
Valley, to take one of thousands of examples, state funding for a technician
to service the school's 900 computers disappeared, and state subsidies for
teacher aides also dried up, even though enrollment has jumped by nearly 20
percent, to 5,000, since 1998.

Child Support Services in Los Angeles County, which helps single parents
collect support payments from former spouses, also got hit, losing $10.6
million in state funds last April, or 7 percent of its budget. In response,
107 temporary employees were laid off, and 100 full-time workers were
notified that they could soon lose their jobs, although in the end only 32
will probably go, according to Philip Browning, the agency's director.

Across the state, tens of millions have been cut and continue to be cut from
funding for child care and job training, to computerize high schools, pay
performance bonuses to public school teachers, purchase library books for
elementary schools, subsidize research at state universities, and maintain
the value of assets in state employee pension plans. "The fewer deposits in
the pension plans mean your budget shortfall is less, but you can't do this
for very long," said G. Eugene Steuerle, a senior fellow at the Urban
Institute in Washington.

Medicaid outlays are still rising in California, but no longer by enough to
cover inflation or the growing number of poor people seeking care, although
as part of the Bush-sponsored tax cuts enacted in May, the states are
getting a $20 billion one-time infusion of federal money, with half of it
earmarked for Medicaid. California's share is $2.4 billion. "It is part of
the solution to the $38 billion ***ulative budget problem," said Brad
Williams, a senior economist at the California Legislative ****yst's Office.
"It helps a lot."

That huge deficit is far and away the largest ever ac***ulated by a state
and is a major issue in the recall vote that Gov. Gray Davis faces in
November. In the attempt to whittle down the deficit, $560 million came out
of state spending in California for kindergarten through 12th grade in the
last fiscal year, and more than $530 million disappeared from the $10
billion earmarked by the state for Medicaid, according to Jean Ross,
executive director of the California Budget Project, a research organization
in Sacramento.

The pain would be worse were it not for some budgetary sleight of hand
performed by a legion of state officials across the country. "Their bag of
tricks is impressively deep," Mr. Johnson said. "Take Illinois. The state
government has sold its big glass office building in downtown Chicago and
pocketed the sales revenue, but instead of moving out, it is renting back
the building."

Many state governments have been reluctant to lay off workers, preferring
instead to freeze hiring and wages and not replace workers who retire or
resign. Some states have raised tax rates to help cover salaries and thus
minimize layoffs. And a great variety of court fines and fees for service
have gone up. Minnesota even came up with a new one: public defenders are no
longer furnished free; defendants now pay $50 or more.

The resistance to layoffs has limited the drop in state employment across
the nation. Employment hit a peak of 5.023 million state workers in June of
last year and has fallen since then by 91,000, or less than 2 percent, the
Bureau of Labor Statistics reports. At the local government level,
employment finally stopped rising this year and flattened out at 13.8
million people, without falling.

The California experience is more extreme by far than what is happening in
the other states, but the maneuvering in California to avoid more outright
spending cuts is illustrative of maneuvering in state capitals everywhere.
In February, for example, the Davis administration sold for $2.5 billion
California's right to collect over the next 25 years a total of $5 billion
or more in tobacco settlement money. Roughly $30 billion of the $38 billion
deficit, in fact, is being dealt with through "borrowing, payment deferrals
and other one-time actions," Mr. Williams said.

Then there is the growing practice, evident in California and Minnesota,
among other states, of adopting optimistic forecasts of future economic
growth and assuming that tax revenues will rise as the forecasts
materialize. Minnesota, for example, is counting on the gross domestic
product to be growing by early fall at a 3.5 percent annual rate, not the
current 2.6 percent.

In still another maneuver, some states have reduced the spending that
appears on their books for a given fiscal year by delaying the payment of
June subsidies to school districts until July, the start of the next fiscal
year in most states. "What it means is that the school districts have to
borrow more money so they can get by in June," said William Marx, chief
fiscal ****yst for the Minnesota House of Representatives.

The states experienced a similar deficit problem in the early 1990's, during
the last recession-and-recovery period, but the amounts involved were much
less and the impact on the economy almost nil. This time, total spending by
the states, which nearly doubled over the decade to more than $1.1 trillion
a year, has slowed to a growth rate of barely 1 percent annually from an
average of nearly 7 percent in the 1990's.

The slowing has been in response to a sharp drop in state tax revenue, which
rose precipitously in the booming late 1990's, in part as a result of the
stock market bubble and the capital gains taxes collected on market profits.
As tax revenue rose, spending by the states also increased. So did each
state's rainy day reserves, even though many states cut taxes during the
good years. Now the reserves have been depleted, forcing the states to
increasingly cut back spending or find other ways to balance their budgets -
as every state except Vermont is required to do by law.

Because state tax collections are indirectly linked to those at the federal
level, the Bush administration's tax cuts have fed through to the states as
parallel cuts. But the hardest-hit states, California and Minnesota among
them, have been those with progressive income taxes, charging upper income
households at considerably higher rates than those at the low end. As
incomes have fallen, tax collections have fallen faster in these states than
in those without progressive tax rates.

Mr. Marx in Minnesota is counting on a rebound in the economy by early fall
to increase employment, incomes and tax collections. His projections of the
tax revenues that the state will collect in the current fiscal year rely on
the rebound occurring on schedule.

"We are optimistic in this projection," Mr. Marx said. "But the projection
is based on a forecast that was produced for us in February, and the rebound
has not happened yet."

Copyright 2003 The New York Times Company

--
--
FAIR USE NOTICE: This post contains copyrighted material the use of which
has not always been specifically authorized by the copyright owner. I am
making such material available in an effort to advance understanding of
environmental, political, human rights, economic, democracy, scientific, and
social justice issues, etc. I believe this constitutes a 'fair use' of any
such copyrighted material as provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107

"If this were a dictatorship, it'd be a heck of a lot easier, just so
long as I'm the dictator." - GW Bush 12/18/2000.

"To announce that there must be no criticism of the president, or that
we are to stand by the president right or wrong, is not only unpatriotic
and servile, but is morally treasonable to the American public."
---Theodore Roosevelt

"I think all foreigners should stop interfering in the internal affairs of
Iraq."
-- Deputy Defense Secretary Paul Wolfowitz,