Money Morning Mailbag: State Budgets Far From Healed After Recession

Question: Which of the states are doing best and worst?

- Kathryn

Answer: The first 9 months of 2009 handed states the biggest revenue decline in history and the bleeding hasn't stopped. The Center on Budget and Policy Priorities (CBPP) estimates state budget gaps will grow to $350 billion over the next two years, with every state in "fiscal trouble" except Montana and North Dakota. California is projected to hit $20 billion and New York $9 billion.

Government overspending and the lingering effects of the housing crisis have halted states' growth. Now tax increases to raise money aren't accomplishing enough, and funding and salary cuts are creating financially strapped households. State budgets are pulled tight with not much more room to give.

The measurement of "best" and "worst" states should minimally take into account real estate prices, unemployment rates, budget deficits and liabilities. For a 50-state ranking comparing government debt and liabilities, Forbes.com measured the best and worst states, examining such factors as debt per capita, unfunded pensions per capita, and gross state product. 

Utah was ranked as having the healthiest debt situation. It had AAA credit ratings from Moody's Corp. and Standard & Poor's, with only $447 per capita debt and 6.9% unemployment - currently the best in the United States.

New Hampshire, Nebraska, Texas and Virginia rounded out the top five "healthiest" states.

Illinois fell to last in the same poll, with a debt rating of A1 by Moody's (second worst only to California) and fifth highest unfunded pension obligations per capita. New York, Connecticut, California and New Jersey finished the bottom five.

Unfunded pension liabilities are why some states will continue to do poorly. They comprise part of states' "unstated debts," meaning they are strategically off the balance sheets and pushed into future debt, giving a skewed view of states' current debt levels.

California for example states its debt at 8% of its total economy, but add in the pension fund and the state burden grows to over four times as much - 37% of economic output.

Joshua Rauh, a Northwestern University economist, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of states' pension obligations at the rate bond markets value debt and arrived at a 50 state total of $5.17 trillion. Only $1.94 trillion is earmarked for pensions now, leaving a $3.23 trillion hole to fill.

Also on states' cost horizon is healthcare. The full cost of healthcare reform won't be realized for years but has many states concerned for their cash-strapped budgets. The reform bill President Barack Obama signed into law March 23 extended Medicaid coverage to childless adults living at the poverty level, including as many as 16 million more people. Some states already have those costs covered, others don't.

States that don't extend this coverage will initially receive a 100% government subsidy but over time will have to pick up those costs. States like Texas, that claim it'll cost them about $370 million annually, will have to find more room in the budget. The additional state costs imposed by healthcare reform prompted 14 states to file a suit over the law's constitutionality.

State budgets facing the worst woes will continue to trim until they turn around - a bad sign for taxpayers. This is just a small piece of what the CBPP lists as upcoming measures for state cost cutting:

• California proposes a $1.5 billion cut to K-12 education spending and a 5%-10% reduction to state employee salaries
• Maine is looking at a 10% cut in Medicaid provider payments and three additional state government furlough days
• New York proposes a $1.1 billion cut to state education aid and $143 million in funding cuts to public colleges and aid programs

For readers feeling the effects of previous cost-saving measures and fearing the ones to come, what do you see in your hometowns as signs of poor state economies? How have budget cuts affected your families and businesses? What do you feel your state is doing right and where do you see them lacking?

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