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State Budgets in Trouble

October 09, 2008

9808state_budget_shortfallsf1Home values, retirement accounts, and institutional endowments aren't the only things heading south in the current economic climate. According to the Center on Budget and Policy Priorities, a nonpartisan policy think tank in Washington, D.C., the credit crunch has contributed to new gaps in the budgets of at least fifteen states and the District of Columbia just two months after those states struggled to close the largest budget shortfalls seen since the recession of 2001. Because states are required to adopt a balanced budget going into a fiscal year (which starts July 1 for most states), the additional shortfalls will force states to cut spending, use reserves, and/or raise revenues over the coming months.

(Image courtesy Center on Budget and Policy Priorities)

The fifteen states facing additional shortfalls are:

Budget gap (as a % of the total budget): 22%
Gap: $22.2 billion

Budget gap (as a % of the total budget): 19.9%
Gap: $2 billion

Budget gap (as a % of the total budget): 19.9%
Gap: $5.1 billion

Budget gap (as a % of the total budget): 16%
Gap: $1.2 billion

Rhode Island
Budget gap (as a % of the total budget): 13.1%
Gap: $430 million

New York
Budget gap (as a % of the total budget): 9.8%
Gap: $5.5 billion

Budget gap (as a % of the total budget): 9.5%
Gap: $784 million

Budget gap (as a % of the total budget): 8.7%
Gap: $1.8 billion

New Jersey
Budget gap (as a % of the total budget): 7.7%
Gap: $2.5 billion

Budget gap (as a % of the total budget): 7.2%
Gap: $1.1 billion

Budget gap (as a % of the total budget): 7.1%
Gap: $1.2 bil

Budget gap (as a % of the total budget): 6.8%
Gap: $83 million

New Hampshire
Budget gap (as a % of the total budget): 6.4%
Gap: $200 million

Budget gap (as a % of the total budget): 6.3%
Gap: $1.8 billion

Budget gap (as a % of the total budget): 6%
Gap: $217 million

South Carolina
Budget gap (as a % of the total budget): 5.7%
Gap: $390 million

Budget gap (as a % of the total budget): 5.5%
Gap: $350 million

Budget gap (as a % of the total budget): 5.4%
Gap: $935 million

Budget gap (as a % of the total budget): 4.8%
Gap: $472 million

Budget gap (as a % of the total budget): 4.6%
Gap: $527 million

District of Columbia
Budget gap (as a % of the total budget): 2.1%
Gap: $131 million

(Source: CBPP, BusinessWeek)

Fasten your seat belts, everyone. We're in for a bumpy ride.

-- Mitch Nauffts

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Posted by Amit Shah  |   October 09, 2008 at 03:34 PM

Very timely post ---and very scary, espcially for instructional materials developers who are beholden to state and district funding to tay in business. The crisis, of course, permeates every aspect of our lives.

Posted by Matt  |   October 10, 2008 at 09:32 AM

I keep hearing people say in jest, "That's it, I'm moving to Canada," or "That's it, I'm off to Europe," but the economic story isn't really any better in those places.

The verb of the day is "brace," as in 'Charities Brace for the Worst.' May you live in interesting times, indeed!

Posted by DJ  |   October 13, 2008 at 11:09 AM

Guess it is time for states to learn that age-old lesson: live within your means.

Or jack up taxes as much as you can get away with!

Posted by mitchn  |   October 13, 2008 at 12:26 PM

Isn't it ironic, DJ, how commonsensical advice -- live within your means, don't assume prices always go up, don't trade things you don't understand, don't bring the world economy to the edge of disaster by increasing the leverage on your balance sheet to 30:1 -- fall on deaf ears when the good times are rolling. (Almost forgot my favorite: Don't treat your execs to a $400,000 spa weekend after you've accepted a $127 billion bailout from the U.S. taxpayer.) Of course, the difference between states with shortfalls and the geniuses on Wall Street is that, in the case of the former, real programs serving real people will be cut, while the bankers and brokers responsible for the credit mess will walk away with their hundreds of millions in compensation and bonuses for a job well done....

Posted by DJ  |   October 13, 2008 at 02:38 PM


I have to disageree with you to some extent that it is the "bankers and brokers" responsible for the credit mess.

The Street was only taking their cue from Uncle Sam. The Uncle made it a matter of policy that loans be given to people who were not really able to afford them (hence, "subprime") and then Fannie and Freddy - quasi-governmental agencies - decided to guarantee all that soon to be worthless paper. That's where this all started.

We all know Wall St. moguls aren't nearly as bright as they think they are- they're the masters of "me too". We saw the lemming behavior with junk bonds, we saw it with dotcoms, and now we're seeing it with subprime. Don't blame the lemmings for following the leader...

As for cutting "real programs" that's entirely the perrogative of the individual states. There's plenty of pork and waste they can cut if they so chose, never doubt that for a second.

Posted by mitchn  |   October 13, 2008 at 03:47 PM

Sorry, DJ, I just don't buy the CRA meme that's being pushed by Republicans and assorted wing-nuts in the right-wing press and blogosphere. The best deflating of that pernicious meme I've seen can be found on Barry Ritholz's terrific Big Picture blog (http://bigpicture.typepad.com/):

As BR wrote in an Oct. 2 post:

"Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

• How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?

• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment -- at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?

The answer to all of the above questions is no, none, and nothing at all.

The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron's, there is plenty of things to be angry at D.C. about -- but this ain't one of them."

Link: http://bigpicture.typepad.com/comments/2008/10/misunderstandin.html

Let's, for the sake of the argument, agree that Congress' terrible oversight of Frannie and Freddie helped create a subprime problem in certain bubble markets. Those bad mortgages would have remained a localized problem but for two things:

(Excessive) Securitization + Leverage

Or, as Andy Serwer and Allan Sloan put it in the Sept. 29 issue of TIME magazine ("How Wall Street Sold Out America"):

"You've heard, of course, that subprime mortgages -- 'subprime' is Wall Street's euphemisim for junk -- are where the problems started. That's true, but the problems have now spread way beyond them. Those predicting that the housing hiccup wouldn't be a big deal -- what's a few hundred billion in crummy mortgage loans compared with a $13 trillion U.S. economy or a $54 trillion world economy? -- failed to grasp that possibility. It turned out that Wll Street's greed...was supplemented by ignorance. Folks in the world of finance created, bought, sold, and traded securities that were too complex for them to fully understand....

"Consider Lehman Brothers....Even though Lehman has a 158-year-old name, it's actually a 14-year-old company that was spun off by American Express in 1994. AmEx had gobbled it up 10 years earlier, and it wasn't in prime shape when AmEx spt it out. To compensate for its relatively small size and skinnhy capital base, Lehman took risks that proved too large. [And paid its CEO and senior managers lavishly.] To keep profits growing, Lehman borrowed huge sums relative to its size. Its debts were about 35 times its capital, far higher than its peer group's
ratio. And it plunged heavily into real estate ventures that cratered.

"Here's how leverage works in reverse. When things go well. as they did until last year, Lehman is immensly profitable. If you borrow 35 times your capital and those investments rise only 1%, you've made 35% on your money. If, however, things move against you -- as they did with Lehman -- a 1% or 2% drop in the value of your assets puts your future in doubt...."

Excessive securitization and leverage -- not the Community Reinvestment Act -- is what brought us to this pass. And until soemthing is done to regulate the former and re-regulate the latter, any bailout of the financial sector will merely be a hideously expensive band-aid, courtesy of the U.S. taxpayer, applied to a sucking chest wound....

Posted by DJ  |   October 14, 2008 at 11:14 AM


You weaken your overall argument severely with your "assorted wing-nuts" line, but I digress.

I think that you've perfectly gone all-in on the left's own meme - that unsupervised Wall St. "fat cats" are entirely to blame here.

I find it exceedingly convenient that our political class is pushing public focus and rush to blame on that sector, which just happens to have the double bonus of helping advance their agenda, AND keep the public from looking in their direction. Because some of them have much to answer for. And even more chillingly - they're still there in the positions of oversight and authority!

The regulators themselves warned that Fannie and Freddy were in danger, but were rebuffed by the congressional committee.

Hey, I'm not carrying water for Wall Street -bad business is bad business, no matter how encouraged by Uncle Sam. But the blame surely does not just go only 1 way here?

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