Governors’ New Budgets Indicate Loss of Many Jobs if Federal Aid Expires

February 19, 2010

States face continued major budget problems, because of the steepest-ever decline in state revenues and the end of most federal Recovery Act assistance halfway through their coming fiscal year. As a result, governors are proposing a new round of deep budget cuts that would increase unemployment and threaten the fragile economic recovery. Without further federal aid, the actions states will have to take to close their budget gaps could co st the economy 900,000 jobs.[1] Congress is considering extending some assistance to states as part of forthcoming jobs legislation.

A recent Goldman Sachs report underlines the importance of state fiscal conditions to the health of the economy. Goldman projects economic growth will slow later this year, in part because “state and local budget cutbacks will almost certainly still be weighing on overall demand.” [2] Similarly, Mark Zandi, Chief Economist of Moody’s Economy.com, recently warned that large state budget cuts next fiscal year “will be a serious drag on the economy at just the wrong time.”[3]

State Budget Cuts Weaken Economy by Reducing Demand
States confront an estimated $180 billion budget gap for fiscal year 2011, which begins July 1, 2010 in most states. The majority of governors now have submitted their 2011 budget proposals, and they demonstrate the scale of cuts that are likely to be pursued to close this large gap. For example, Arizona’s governor would eliminate the state’s children’s health insurance program which covers 47,000 children and repeal Medicaid coverage for more than 310,000 adults with low incomes and/or serious mental illnesses. Mississippi’s governor would cut state funding for K-12 schools by over 9 percent and close four state mental health clinics. Hawaii’s governor would eliminate a program that provides cash assistance to low-income people who are elderly or have disabilities and also make large cuts to the state workforce. New York’s governor would eliminate municipal aid to

New York City and make deep education and health care cuts. (Further details of governors’ proposed cuts are below.)

Most governors who have released their budget proposals for the coming fiscal year are proposing smaller budgets in 2011 — typically by 5 to 10 percent — than their states spent in 2009, even though most states face rising numbers o f people in need of public services and growing populations.

When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. As a result, budget cuts directly remove demand from the economy, which in turn costs jobs.

Recovery Act Assistance Has Averted Many Job-Killing Budget Cuts
Job loss would have been much more severe were it not for significant fiscal relief provided in the AmericanRecovery and Reinvestment Act (ARRA). Congress authorized this aid in large part to help states — which are facing record revenue declines due to the recession — avert budget-balancing actions that would further weaken the U.S. economy. ARRA gave states roughly $140 billion over two and a half years to help fund ongoing programs, primarily education and health care programs. These funds closed about 30 percent to 40 percent of states’ 2009 and 2010 budget shortfalls. Without them, cuts in health care, education, human services, public safety, and other areas would have been much deeper, and job losses much larger.

Even with the federal assistance, at least 44 states plus the District of Columbia have cut services, including health care services (29 states), services to the elderly and disabled (24 states and the District of Columbia), K-12 education (28 states and the District of Columbia), higher education (38 states), and other areas.[4] At least 42 states plus the District of Columbia have reduced overall wages paid to state workers through layoffs, furloughs, hiring freezes, or similar actions. In addition, about 30 states have raised taxes.

States and Localities Also Eliminating Jobs Through Layoffs

As this report explains, cuts in state and local services reduce the number of jobs in the economy by shrinking overall demand. But states and localities are also contributing to high unemployment more directly, by laying off public workers — and at an increasingly rapid pace.

¦In January 2010 alone, states and localities cut 41,000 jobs. States eliminated 18,000 jobs; localities (which get much of their funding from states) eliminated 23,000 jobs.a
¦These new job losses bring to 172,000 the total number of state and local government jobs lost since January 2009 . Most state and local government workers fall into one of the following categories: schoolteachers and other school employees, university workers, police officers, firefighters, corrections workers, highway and transit workers, public hospital employees, public health workers, public utility employees, and parks and environmental workers.
Additional job losses are likely in the coming months, as states expect only modest revenue growth in the coming year. This would be consistent with previous recessions: state budgets typically recover two to four years after a recession officially ends, leading to continued job losses that slow the recovery. In the 25 months following the end of the (much milder) 2001 recession, for example, states cut 71,000 workers. The job losses ended only in December 2003, when the federal government enacted $20 billion in emergency aid to states. Since state revenues fell much more sharply in the 2007-2009 recession, it is reasonable to predict a greater loss of jobs over a longer period of time.

a Bureau of Labor Statistics, “The Employment Situation – January 2010,” Table B-1, Feb. 5, 2010, http://www.bls.gov/news.release/empsit.t17.htm.
Governors’ Budget Proposals Demonstrate Serious Economic Consequences if Congress Fails to Extend Assistance
The bulk of ARRA’s fiscal relief — a temporary increase in the federal share of Medicaid costs — will expire on December 31. States also will have spent most of their education fiscal relief funds by that time. This means that without additional fiscal relief, states will have to institute massive new budget cuts and tax increases at the start of the new fiscal year on July 1, when unemployment is expected to remain at or near double-digit levels and the economy will likely still be fragile.

The majority of governors have now released their proposed budgets for the upcoming fiscal year. While many of those proposals will be changed before they are enacted, they are indicative of the magnitude of the cuts that states are facing.

¦Alabama’s governor is proposing a hiring freeze that would reduce the non-education state workforce by 2,000 workers by the end of fiscal year 2011.
¦Arizona’s governor is proposing deep cuts to a range of programs and services. If enacted, her budget would: eliminate the state’s children’s health insurance program (KidsCare), which covers 47,000 children; repeal Medicaid coverage for more than 310,000 adults with low incomes and/or serious mental illnesses; make deep cuts to support for early learning by eliminating preschool for 4,328 children and eliminating state support for full-day kindergarten; and reduce the number of months that low-income families can receive cash assistance through the Temporary Assistance for Needy Families (TANF) program, immediately eliminating assistance for 10,000 poor families, among other cuts. (Under the governor’s plan, the repeal of Medicaid coverage would not take effect if the federal government provides additional Medicaid funds.)
¦California’s governor is proposing deep cuts to health care, education, the state workforce and human service programs beyond those already enacted. Specific cuts include additional deep reductions to Medi-Cal (Medicaid) services, a $1.5 billion reduction in K-12 and community college funding in 2010-11, a 5 percent to 10 percent cut in state employee salaries, a reduction in monthly grants to low-income people who are elderly or have disabilities, elimination of the state’s Calworks program (which provides employment services and basic cash assistance for very poor families with children) and a number of other human service programs, and elimination of funding to respond to enrollment growth in the state’s public universities.
¦Colorado’s governor proposes to eliminate a scheduled increase in K-12 funding that would cover enrollment and cost increases and implement an additional cut of $223 million in school aid. He also proposes delaying payments to Medicaid providers and cutting payment rates.
¦Connecticut’s governor proposes cuts to early care, health care, and other services. Her budget cuts funding for a program that provides child care subsidies to low- and moderate-income working families by 12 percent. It would increase health insurance co-payments and in some cases premiums for more than 15,500 children and 124,000 adults, and would no longer pay for most non-prescription medications, vision services, and eyeglasses for the adults. Other lower-income individuals who now receive subsidies for purchasing health insurance from a state-run health plan would have to pay full price, with the likely result that many of the roughly 13,000 participants in the plan would drop coverage entirely.
¦Delaware’s governor proposes five days of furlough for teachers, state police, and other public workers.
¦Georgia’s governor proposes cuts to e ducation that would reduce K-12 spending by nearly 11 percent from pre-recession levels; state university spending would be reduced by more than 9 percent.
¦Hawaii’s governor is proposing large cuts to the state workforce, including the layoffs of up to 1,198 employees. She also is proposing elimination of a program that provides cash assistance to low-income senior citizens and people with disabilities; elimination of the Department of Health’s Division of Community Health and Dental Hygiene Services; and curtailing the state’s Medicaid adult dental services benefits.
¦The governor of Louisiana proposes a 3 percent cut in rates for certain Medicaid providers.
¦Maine’s governor is proposing 10 percent cuts in payments to certain Medicaid providers (primarily to long-term care providers), and a further cut in overall K-12 education spending beyond cuts already enacted.
¦The Massachusetts budget proposes a $174 million reduction in Medicaid provider rates and the elimination of restorative dental services such as fillings and root canals for 200,000 adults, and virtually eliminates state funding for a program providing housing vouchers to homeless families.
¦Maryland’s executive budget proposal calls for a reduction of $123 million in Medicaid payment rates to hospitals, $330 million in cuts to local aid relative to current statutory levels, and up to 10 furlough days for state employees.
¦The governor of Michigan proposes encouraging early retirement for state workers and teachers and eliminating one-third of the state jobs left vacant. Her budget would reduce health benefits for new state employees and retirees, and eliminate a three percent salary increase for many state workers. The governor’s budget also cuts funds to higher education. It eliminates a program that gives college scholarships to low-income students, and cuts back another one.
&# x0A;¦Mississippi’s governor is proposing to cut state aid to K-12 schools by over 9 percent, close four mental health facilities, and cut most other agencies’ budgets by 12 percent.
¦In his proposed adjustments to the state’s two-year budget, Nevada’s governor proposes myriad cuts to health care and education. Under his proposal, the state would cut reimbursement rates for health providers, and limit its willingness to pay for products such as bedpans and adult diapers. Health insurance premiums would as much as triple for 22,000 children, some 6,300 adults would lose access to vision services, and other services including dentures and physical and speech therapy also would be cut back. He also proposes cutting up to $176 million in education funding, likely resulting in some combination of teacher layoffs, pay cuts, or shortened school years. He would also reduce independent living grants to seniors, cut funding for local child welfare and child protective services, and lay off 235 state workers.
¦While New Jersey’s new governor has yet to release his FY2011 budget, he announced plans to eliminate eligibility for a key state-subsidized health insurance program for nearly 12,000 legal immigrant adults and to freeze new enrollment in the program for all other adults in the current fiscal year.
¦New York’s governor is proposing a $1.1 billion cut to state education aid; more than $400 million in reduced payments to health care providers and about $100 million in other health-related cuts; $143 million in funding cuts for four-year public colleges and cuts to a financial aid program serving students from low- and moderate-income families; and the elimination of state revenue-sharing aid to New York City along with a reduction in revenue-sharing aid to other localities.
¦The governor of Rhode Island proposes eliminating state reimbursement to cities and towns for the loss of revenue caused by state legislation e liminating local taxes on the value of motor vehicles — a source of revenue equal to roughly 7 percent of local tax revenues. He also proposes cutting state funding for K-12 education by more than 3 percent and higher education by nearly 6 percent below enacted FY10 levels.
¦South Carolina’s governor is proposing capping total enrollment in the state’s children’s health insurance program.
¦In Tennessee, the governor proposes reducing state Medicaid spending by 7.5 percent ($174 million). He proposes doing this by capping the amount that the state will pay for an individual to receive inpatient hospital care each year at $10,000, which is well below hospitals’ actual costs for many patients. He would also eliminate occupation, physical, and speech therapy services, and allow no more than eight lab and x-ray procedures per year for adults. The governor’s proposal also would eliminate the jobs of nearly 400 state workers.
¦Vermont’s Governor recommends a host of spending cuts, primarily focused on human service programs and education, including a 3 percent reduction in Medicaid provider rates, Medicaid premium increases, caps on some Medicaid services like the number of emergency room visits, and an increase of 20 percent in the average number of students per teacher.
¦Before leaving office, Virginia’s former governor proposed a budget for the coming biennium that would (in 2011) cap state funding for school support staff such as janitors, administrative assistants, and school psychologists; reduce funding to local sheriffs and police departments; impose an enrollment freeze for most Home and Community-Based Care waivers that allow people who are elderly or have disabilities to receive treatment in their own homes and communities instead of in an institutional setting (with additional cuts likely in fiscal year 2012); and lay off 664 state employees.
¦Washington’s governor is proposing de ep cuts to education and health care. She is proposing: eliminating two education programs, both of which reduce class sizes and one of which provides professional development for teachers; cutting the state work-study program as well as several smaller financial aid programs that help 11,000 students go to college; reduced funding for two- and four-year colleges, likely resulting in administrative cuts, larger class sizes, and elimination of support services such as student advising; and a 20 percent reduction in early interventions and 25 percent reduction in direct client services for HIV and HIV-vulnerable populations.
¦Wyoming’s governor is proposing cutting state aid for local governments by more than half.
Other governors have simply provided a dollar figure for the cuts that state agencies would likely receive under the proposed budget, without fully explaining how these cuts would be achieved or how many people would lose access to services as a result.

At least seventeen of these governors — eight Republicans and nine Democrats in Alabama, California, Connecticut, Florida, Georgia, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Mexico, New York, Pennsylvania, Rhode Island, and Washington — assume in their budgets that the increase in federal Medicaid assistance will be extended for the rest of state fiscal year 2011, and the National Governors Association has formally requested the extension.[5] Such an extension is included in legislation that the House of Representatives passed last fall. If the federal government does not extend this aid, these states likely will be forced to make deeper and broader cuts than those they have already proposed.