Waves of job losses sap U.S. states' budgets

By Lisa Lambert

WASHINGTON (Reuters) - Already sapped by a long U.S. recession, states' budgets will likely shrivel even more as waves of Americans lose their jobs, and the damage done to public services such as education could last for years.

Looking at the U.S. unemployment rate, which stands at 9.5 percent and is projected to rise above 10 percent, National Governors Association Executive Director Raymond Scheppach said states' economic conditions are going to "get worse in about 10 months, and it'll stay bad for a while."

During any recession, problems caused by job declines appear in states' budgets late in the downturn and are hard to eliminate. Unemployment injures the budgets so badly that economists use jobless rates instead of production and growth to measure the depth of states' recessions.

"People become unemployed and they first look around for another job for a while and only after a number of months of not getting a job ... try to get on the Medicaid rolls," Scheppach said, adding that the healthcare program for the poor, which is jointly administered by states and the federal government, makes up 22 percent of the average state budget.

That pushes the amounts states spend on the program up just as their income tax receipts drop.

"States will lose sales tax fairly early in the cycle because people start cutting back in purchasing things. But the big loss, of course, is going to be in income tax revenues and that's pretty aligned with unemployment," Scheppach said.

On average, personal income tax collections constitute a third of annual state revenue. In the first four months of 2009 states' personal income tax collections were $28.8 billion lower than the total pulled in during the same period in 2008, according to a Rockefeller Institute of Government report.

Oregon's state treasurer recalls the pain of the aftermath of the last U.S. recession which ended in November 2001.

"Oregon's revenues had fallen further and faster than any state in the nation, save one for a couple of months," State Treasurer Ben Westlund recently told Reuters. Alaska, briefly, had seen oil-related revenue plunge.

A drop in demand for manufactured capital goods such as computer equipment and metals had hit the state hard, according to Oregon's legislative revenue office, and a strong dollar drove down Oregon's exports.

For months after the U.S. recession's end job creation languished and social service spending was stretched in the Pacific Northwest state.

"Those effects linger much longer than the actual term of the recession itself," Westlund said.

PAST AS PROLOGUE

During the last recession, state budgets suffered for more than three years after the national recovery began, said Elizabeth McNichol, senior fellow at the Center on Budget Policy and Priorities, which studies states' economies.

Flash forward to 2009 and the worst recession in decades has resulted in enormous budget deficits in most states, with some gaps at record levels.