An Update on State Budget Cuts

September 4, 2009

With tax revenue declini ng as a result of the recession and budget reserves largely drained, the vast majority of states are making spending cuts that hurt families and reduce necessary services. These cuts, in turn, will make the recession worse because families and businesses have less to spend in their local economies. Federal recovery act dollars and funds raised from tax increases are greatly reducing the extent, severity, and economic impact of these cuts, but only to a point.

The cuts enacted in at least 41 states plus the District of Columbia are occurring in all major areas of state services, including health care (27 states), services to the elderly and disabled (24 states and the District of Columbia), K-12 education(25 states), higher education (34 states), and other areas. States are making these cuts because the recession has caused declining revenues from income taxes, sales taxes, and other revenue sources used to pay for these services. At the same time, the need for these services has not declined and has, in fact, risen as the number of families facing economic difficulties increases.

And these figures do not include the proposed cuts that some states are still discussing. As of September 3, two months into their new fiscal years, Arizona and Pennsylvania have not yet enacted budgets for the new year. Michigan also does not yet have a budget for its next fiscal year that begins October 1. These states — along with other states that are facing new budget gaps resulting from lower-than-expected revenue forecasts — are almost certain to face further cuts in services.

Cuts to state services not only harm vulnerable residents but also worsen the recession by reducing overall economic activity. When states cut spending, they lay off employees, cancel contracts with vendors, reduce payments to businesses and nonprofits that provide services, and cut benefit payments to individuals. All of these steps remove demand from the economy. For instance, at least 42 states and the District of Columbia have reduced overall wages paid to state workers,by laying off workers, requiring them to take unpaid leave (furloughs),freezing new hires, or similar actions. Such measures not only can reduce the level or quality of service available to state residents,but also reduce the purchasing power of workers’ families, which in turn affects local businesses.

States are taking actions to mitigate the extent of these cuts. Most states are enacting or considering tax increases. At least 30 states in 2009 are addressing their budget shortfalls in part by increasing taxes. Like budget cuts,tax increases remove demand from the economy, by reducing the amount of money people have to spend. But tax increases can be less detrimental to state economies than budget cuts because some of the tax increases affect upper-income households so are likely to result in reduced saving rather than reduced consumption. Many more states will need to consider tax increases or other revenue measures, as well as such steps as tapping state rainy day funds, as a way to minimize harmful budget cuts.

The cuts in state-funded services — and resulting harm to families’ well-being and to state economies — would be much greater had not the federal government enacted the American Recovery and Reinvestment Act in February. The measure is providing roughly $140billion over two-and-a-half years to help states pay for education,health care, public safety, and other key services. In some cases, it is possible to identify specific services that were slated for cuts but have been protected by the federal funds; these include child care in Alabama and Arizona, public safety funding in Virginia and Washington,prescription drugs for seniors and tuition assistance in New York, and education funding in a number of states. In other cases, the specific“what-if” cannot be identi fied. But it is indisputable that familiesand communities would be facing much more serious consequences fromstate cuts without the recovery act funds.

The Deep Recession Is Creating Widespread Deficits

The national recession is producing both declines in state and local revenues and increased need for public programs as residents lose jobs,income, and health insurance. The imbalance between available revenues and what is needed for services led most states to face budget gaps in the now ended 2009 fiscal year. The vast majority of states also faced(or are facing) additional shortfalls projected for the 2010 fiscal year, which in most states began July 1, 2009. Even more budget gaps are projected for fiscal year 2011. Total shortfalls for 2010 and 2011have been estimated at $350 billion, and could be even higher if job losses fail to stop soon.[1]

Virtually all states are required to balance their operating budgets each year or each biennium. Unlike the federal government, states cannot maintain services during an economic downturn by running a deficit. States had record reserves heading into this recession, but those have mostly been drawn down. Since federal economic recovery funds are closing, on average, about 40 percent of budget gaps, states must address remaining shortfalls with a combination of spending cuts and/or tax increases.

State Budget Cuts

States began cutting their budgets last spring, as the recession brought sharply weakened revenues. The cuts have intensified as the economy has worsened. At least 41 states to date plus the District of Columbia have reduced services since the recession began. Service cuts with particular ramifications for vulnerable populations have occurred in the following areas:

• Public health programs:At least 27 states have implemented cuts that will restrict low-income children’s or families’ eligibility for health insurance or reduce their access to health care services. For example, Rhode Island eliminated health coverage for 1,000 low-income parents; Minnesota is canceling a health insurance program for 29,500 low-income adults; and California is increasing costs borne by families of nearly 1 million children that participate in its state children’s health insurance program. Washington is increasing premiums by an average of 70 percent for a health plan serving low-income residents.
• Programs for the elderly and disabled:At least 24 states plus the District of Columbia are cutting medical,rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services. For example, Ohio has made deep cuts to community mental health services, Rhode Island is requiring low-income elderly people to pay more for adult daycare, and Arizona eliminated temporary health insurance for people with serious medical problems.
• K-12 education: At least 25 states are cutting aid to K-12 schools and early education programs. California,Florida, and South Carolina have made significant cuts to school aid. As many as 10,000 children in Illinois may lose eligibility for early childhood e ducation, and Massachusetts is reducing funding for a number of early care programs.
• Higher education:At least 34 states have cut assistance to public colleges and universities, resulting in reduction in faculty and staff in addition to tuition increases. Tuition at all 11 public universities in Florida is increasing by 15 percent for the 2009-2010 school year. Students in Washington and other states face significant tuition increases as well,costing families hundreds of dollars per year. Illinois is making deep cuts to state financial aid programs; it expects to cancel for the spring 2010 semester a need-based financial aid program that serves145,00 low and moderate income students.
• State workforces:At least 42 states and the District of Columbia have made cuts affecting state government employees. At least 26 states have instituted hiring freezes, 13 states and the District of Columbia have announced lay-offs, 21 have reduced state worker wages, and several have delayed scheduled pay increases (including cost of living adjustments).

These measures are described in more detail in the Appendix.

The Role of Revenue Increases and Federal Dollars

Several states facing large budget shortfalls have averted deep cuts in vital services by enacting temporary or permanent revenue increases.

• In late 2007 and 2008, some 10 states enacted tax increases, closed loopholes, restricted tax credits, or implemented other revenue-raising measures. Major packages were enacted in Maryland, Michigan, and New York.
• So far in 2009, at least 30 states have raised taxes, sometimes quite significantly. Increases have been enacted or are under consideration in personal income, business, sales, and excise taxes. Major state revenue packages are being enacted this year in California, Connecticut, Delaware, Hawaii, Nevada, New Jersey, North Carolina, and Wisconsin.

States also are using funds made available in the federal economic recovery law passed in February to avert spending cuts. The law gave states roughly $140 billion over a two-and-a-half year period to help fund ongoing programs, including K-12 education, higher education, and health care. The money is addressing approximately 40 percent of states’ 2009 and 2010 budget shortfalls, and will be sufficient to offset about 20 percent of 2011 shortfalls. In state after state, it is abundantly clear that spending and service cuts in health care,education, human services, public safety, and other areas would have been much deeper had the federal funds not been available.

The2009 tax measures and states’ use of federal recovery funds are detailed in separate Center on Budget and Policy Priorities analyses. [2]

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Appendix: Budget Cuts by Area

At least 41 states plus the District of Columbia have enacted budget cuts that will affect services for children, the elderly, the disabled, and families, as well as the quality of education and access to higher education (See table). Those cuts are detailed below.

Public Health Programs

Atleast 27 states have implemented cuts that will restrict eligibility for health insurance programs and/or access to health care services.

•  Arizona is reducing its Medicaid rolls by requiring some adult beneficiaries to reapply for benefits more frequently. (Research has shown such added paperwork requirements cause many eligible people to lose coverage.)The state also cut funding for community health centers and vaccines and suspended funding for the children’s rehabilitative services program, affecting 4,700 children with chronic or disabling conditions.
•  In the state’s latest budget agreement, California cut funding for the Healthy Families program, the state’s CHIP program. To m ake up for the lost funds, the nearly 1 million children in the program will have to pay more for visits to health care providers, and many will have to pay higher premiums as well. These cost increases may cause some families to drop from the program. In addition to these changes, the state cut nearly all funding for services supporting HIV/AIDS patients, and it completely eliminated funding for the state’s domestic violence shelter program and maternal, child and adolescent health programs.
•  Massachusetts sharply cut funding for subsidized health insurance for close to 28,000 legal immigrants. The affected individuals will receive at best a level of health coverage that falls far short of basic health insurance.
•  Minnesota has eliminated funding for its General Assistance Medical Care program,which provides health care to 29,500 low-income persons between the ages of 21 and 64 who have no dependent children and do not qualify for federal health care programs.
•  Rhode Island has reduced the maximum income level at which parents can receive public health insurance to 175 percent of the federal poverty line from185 percent, eliminating coverage for approximately 1,000 parents. More than 7,800 other low-income families are paying higher monthly premiums for public health insurance.
•  Utah cut Medicaid funding for physical therapy, occupational therapy, and speech and hearing therapy services for adults – as well as Medicaid provider rates for hospitals, skilled nursing, and dentists.
•  Washington is increasing premiums by an average of 70 percent for a health plan serving low-income residents. Premiums for the poorest plan members —those earning up to 125 perc ent of the poverty line — will double. The premium increase is expected to cause between 7,000 and 17,000enrollees to leave the program.
•  Several states, including California, Michigan, Nevada, and Utah, have dropped coverage of dental and/or vision services for adult Medicaid beneficiaries.
•  Other states that have enacted cuts in Medicaid or CHIP include Colorado, Florida,Georgia, Idaho, Illinois, Louisiana, Maine, Maryland, Massachusetts,Michigan, Missouri, New Hampshire, New Jersey, New York, NorthCarolina, Ohio, South Carolina, Tennessee, Wisconsin, and Wyoming. Cuts include reduced or frozen reimbursements to health care providers.

Programs for the Elderly and Disabled

Atleast 24 states and the District of Columbia have cut medical,rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities or significantly increased the amounts that such people must pay for services.

•  Alabama has ended homemaker services for approximately 1,100 older adults.These services often allow people to stay in their own homes and avoid nursing home care.
•  Arizona has eliminated temporary health insurance for people with disabilities who are coping with serious medical problems. The state also eliminated general assistance, a program designed to provide time-limited cash assistance to adults with physical or mental disabilities. In addition,in February 2009 the state eliminated independent living supports for450 elderly residents and respite-care funding for 130 caregivers. It also established a waiting list for vocational rehabilitation services,affecting 2,100 disabled individuals.
•  Florida has cut Medicaid reimbursements to hospitals and community-based services for the elderly, such as meals and homemaker services.
•  Georgia has reduced such programs for the elderly as services for people with Alzheimer’s Disease, elder service centers, prescription drug assistance, and elder support.
•  In Massachusetts,the governor has ordered cuts in programs for elders, including home care, geriatric mental health services, and prescription drug assistance.
•  Minnesota has capped enrollment at current levels for a program that provides expanded health services and care coordination for people with disabilities.
•  New Mexico has cut cash assistance payments for low-income disabled residents by one-third. The state provides these payments to an average of 2,100disabled individuals each month who cannot work and are not eligible for Temporary Assistance to Needy Families.
•  Ohio has eliminated virtually all state funding for mental health treatment for individuals who are not eligible for the state’s Medicaid program.
•  In Rhode Island,low-income elderly people must pay higher rates for subsidized adult day care. This is estimated to affect more than 1,200 people with incomes below $20,000.
•  Tennessee has reduced community-based services for people with intellectual disabilities and cut nursing services for some adults with serious disabilities.
•  Vermont has reduced some home-based services, such as housekeeping and shopping, for people who are elderly or disabled. Such services help people stay in their own homes and possibly delay or avoid more expensive nursing home care.
•  Virginia has decreased reimbursements for special hospitals serving people with needs relating to mental health, mental retardation, or substance abuse. The state also reduced pass-through grants for various aging programs and funding for local mental health providers.
•  Other states that have capped or reduced funding for programs that serve people who have disabilities or are elderly include California, the District of Columbia, Kansas, Louisiana, Maine,Maryland, Michigan, Missouri, North Carolina, Pennsylvania, South Carolina, Utah, and Washington.