Cuts in States' Budgets Mean Slowdown

Feb. 9 -- States have begun to feel the crunch of a slowing economy and are moving fast to slash budgets, but some experts say many states may not be prepared for even a mild recession.

In North Carolina, Gov. Mike Easley was forced this week to take $150 million from a state employee pension fund to cover a budget shortfall of $791 million.

In Alabama, the governor ordered emergency cuts of $266 million from the state's education budget this year.

The economic boom of the late 1990s allowed many states to spend more freely than they had in decades. But in the last several months, a slowdown in the manufacturing sector and declining sales and income tax revenues are forcing states, including Michigan, Pennsylvania, Iowa and Oregon, to rewrite their budgets or consider other measures.

"These budget shortfalls have caught a lot of states by surprise," says Don Boyd, director of the fiscal studies program at the Rockefeller Institute of Government at the State University of New York.

Signs of Leaner Times

The institute, which reviews state budgets quarterly, says the first signs that states could be in for leaner times appeared in July, with a slowdown in sales tax revenues in industrial states like Ohio and Pennsylvania.

State sales tax collections from July to September accounted for 4.7 percent of state revenue, compared to 7.3 percent in the previous quarter. In some states, as much as one-third of the state's budget comes from tax revenues, Boyd says.

The slowdown continued in the last quarter of the year when tax receipts from holiday sales were lower than expected. Poorer Southern states like North Carolina, Mississippi and Alabama, may have been hardest hit by the slowdown.

Boyd also says the effects of a weak stock market shook budgets in some richer states like Colorado. As people lost money, the state took in less revenue from non-wage income tax.

While many states have saved their money and created record reserves, experts say that money could disappear quickly.