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.
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.
In April, the National Conference of State Legislatures forecast total budget gaps would exceed $121 billion in fiscal 2010, which started this month for most states.
“It’s hard to say, given how long and deep this recession is, when states will come out of it. I’m assuming that we’re not going to see significant improvement until 2012,” McNichol added.
As California has recently shown, state budget problems affect all public services. The shortages also hurt cities because states cannot send them any funds.
The federal government provided some relief in the $787 billion stimulus plan Congress passed in February, and the Government Accountability Office recently said that that was playing a critical part in helping states close budget gaps.
But others worry that once the stimulus expires in two years, states will face huge budget problems alone, especially if the recovery from this recession is “jobless.
Economists often call the period after the 2001 recession a “jobless recovery.” Growth stormed back, largely through a housing craze, but employment did not, leaving states vulnerable when another recession began, McNichol said.
Ohio lost jobs in the last recession, reached a plateau during the recovery, and now has lost even more jobs, said Zach Schiller, research director of Policy Matters Ohio, who reported on the state’s economy as a journalist for 20 years.
“We never saw a strong improvement in the job market,” Schiller said about the last recovery.
Heavily dependent on manufacturing, Ohio could be hurt again if automobile parts factories close as part of the car companies’ downturn, and the state may need federal help to recover, Schiller said.
The U.S. government could create trade policies to shelter manufacturing or it could tap Ohio’s factory capacity to make “green” products that emphasize environmental conservation.
But retooling factories or changing trade policy could take a while, and Schiller said the federal government should consider another stimulus plan.
Ohio is not alone in having more than one in 10 citizens unemployed. In May, 15 states registered unemployment rates higher than 10 percent and six hit record highs, according to the U.S. Labor Department.
During the last recession, Oregon made its own changes.
“We did two things that helped pull us out of that recession. We made real cuts and, at the same time, we reformed the benefits package for our public employees,” Westlund said.
The state invested in building up its education and renewable energy sectors, which gives analysts faith Oregon can recover from this recession quickly, Westlund said.
“Those actions will definitely speed up our recovery out of this recession,” he said. “I know of no geographic area on the planet that has escaped this last ‘Great Recession.’ While we were certainly not immune, and we are certainly feeling the impacts, we were just a little better prepared.”
Additional reporting by Karen Pierog in Chicago; Editing by James Dalgleish