We are frequently told that the U.S. economy has recovered from the Great Recession of 2008 and 2009. However, according to a recent report, 32 states still face budget gaps in fiscal 2015, 2016, or both. (Source: Reuters, April 27, 2015.)
Does a Revenue Problem Mean Higher Taxes in the Future?
The fact that a majority of states are facing budget gaps “serves as an early warning,” according to S&P analyst Gabriel Petek. Budget shortfalls question each state’s ability to deal with potential slowdowns.
The report says that the problem is with revenue, not expenditure. Since most states are already making adjustments to their spending, dealing with budget shortfalls will likely require action on the budget side—thus raising taxes.
To pay for education, the state of Nevada is proposing $1.1 billion in taxes. In Alabama, there is a budget shortfall of $700 million; to raise money, the government plans to raise taxes on car sales, cigarettes, and other items. (Source: Bloomberg, May 20, 2015.)
Potential Layoffs, Early Closure of Schools, Low Government Reserves
Low oil prices since last summer have been hitting energy-producing states. Alaska and Oklahoma suffered falls in their revenue. On Monday, May 18, Alaska Governor Bill Walker signed a partial state budget that could result in a layoff of 15,000 workers if the legislators cannot reach a budget deal. (Source: Alaska Journal of Commerce, May 18, 2015.)
Budget gaps are also impacting public schools and parks. In Kansas, budget cuts are forcing schools to close early this year. In Alabama, 15 out of its 22 state parks will be closed if the budget crisis is not resolved. (Sources: KWCH.com, April 27, 2015; AL.com, April 15, 2015.)
State governments are also running low on reserves. In 2006, the median state could run 43.1 days on reserve funds. In 2014, reserve funds for the median state can only last 24 days. Although the number has improved from 2009’s 16.3 days, it is still far away from the pre-recession high. (Source: The PEW Charitable Trusts, last accessed May 20, 2015.)
What We’ve Been Saying All Along
The budget situation of local governments should not be a surprise to regular readers of Profit Confidential. I recently wrote about Chicago’s downgrade. And many of my colleagues have been warning our fellow readers how the fundamentals of the U.S. economy have not been sound for months now. The record highs we are seeing in the stock market are signs of overvaluation rather than a fundamentally strong economy.
If the budget crisis in state governments persists, I wouldn’t be surprised if more downgrades are on the way. And, I question if the federal government will eventually have to step in to bail them out. This will have its own consequences.