Sorry States

Budget shortfalls will add to Washington's woes.

Just before President Obama projected tides of red ink for years to come, New York City Mayor Michael Bloomberg faced up to his own budget Waterloo.

His $63.6 billion budget proposed to cut money from libraries and schools, increase caseloads for child services workers, eliminate 20 fire companies, close four community swimming pools and raise parking fees. He warned that the state budget proposed by Gov. David Paterson would sharpen the pain, forcing layoffs of 8,500 teachers, 3,150 police officers and many other municipal workers.

New York is not alone: the National League of Cities projects that municipalities will face a shortfall of between $56 billion and $83 billion from 2010 to 2012. State governments face an even larger budget gap.

For people who care about the public sector, these are alarming trends-and portents of what's in store for the federal budget as well.

Federal spending for many years has run at about 20 percent of gross domestic product. Economic recovery spending has now kicked that total up to about 25 percent of GDP. With state and local government consuming another 11 percent of GDP, the public sector now accounts for more than a third of the nation's output. And it's hurting everywhere.

States' general fund spending has been growing at a rapid rate-by 36 percent between 2003 and 2008, compared with 32 percent growth in national GDP and a 17 percent increase in the Consumer Price Index, according to E.J. McMahon, senior fellow at the Manhattan Institute for Policy Research. In New York, Lt. Gov. Richard Ravitch has decried this sort of "spending addiction." States' aggregate budget shortfalls in 2011 and 2012 could total $350 billion, estimates the Center on Budget and Policy Priorities.

In its November 2009 report, "Beyond California: States in Fiscal Peril," the Pew Center on the States noted that the Golden State had unsuccessfully sought a $7 billion loan guarantee to pay its bills, issued IOUs to state employees and other creditors, and started shutting state offices several days a month. While this placed California in a league of its own, "the same pressures that drove it toward fiscal disaster are wreaking havoc in a number of states, with potentially damaging consequences for the entire country," the report says.

Nine states are particularly affected, according to Pew: Arizona, Nevada, Oregon, Florida, Illinois, Michigan, Wisconsin, New Jersey and Rhode Island. In Oregon, school districts cut back to a four-day week for lack of money, spurring voters to narrowly pass a referendum in January raising taxes on high earners and on businesses. In Illinois, legislators faced a $12 billion hole in a $26 billion budget. In Florida, Gov. Charlie Crist shocked the nation when he ordered a halt to medical mercy flights from Haiti until Washington agreed to cover the costs.

"These states' budget troubles can have dramatic consequences for their residents: higher taxes, layoffs or furloughs of state workers, longer waits for public services, more crowded classrooms, higher college tuition and less support for the poor or un-employed," the Pew report notes. Forty-eight states face budget shortfalls in 2010. This year, stimulus money is covering 30 percent to 40 percent of the shortfalls in most of them. In New York, a budget deficit estimated at about $8 billion in the fiscal year beginning April 1 could be in the range of $18 billion to $20 billion the following year, as stimulus funding winds down.

The wolf is at the door of city halls and statehouses across the nation. With federal debt growing fast enough to worry even our foreign creditors, his howl certainly is getting louder in Washington too.