Gloom and Doom: States Face Looming Budget Deficits

July 30, 2008 — -- Delaware legislators are considering allowing racetracks to operate 24 hours a day. California Gov. Arnold Schwarzenegger is threatening to cut the pay of thousands of state workers to minimum wage. And Nevada officials are encouraging their state police to drive less to save money on gas.

These are just some of the extraordinary measures being considered by states that face gaping budget deficits that total at least $40.3 billion, almost triple the shortfall the previous year, according to the National Conference of State Legislatures.

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Squeezed by reduced tax revenue and suffering the impact of the housing crisis, the credit crunch and higher unemployment, states across the country are struggling with budget problems that mirror the weak condition of the economy, budget experts say.

"Reduced tax revenue is number one," says Brian Sigritz, staff associate at the National Association of State Budget Officers. "Sales taxes came in a lot lower than expected, were actually slightly lower than last year comparing the first quarters of the calendar year."

Sigritz notes the ripple effect of the housing crisis which impacts sales tax and real-estate transfer tax revenue. "Homes aren't being sold and if people are not doing home improvements, that hurts contractors and other workers and it all reduces the taxes brought in by states."

Across the country, 31 states are projecting budget gaps, and that number doesn't even include large states such as California, Illinois, Michigan and North Carolina, which have not yet completed their budgets.

And on Tuesday, New York Gov. David Paterson delivered a somber speech about the dire state of the state's economy, which he has compared to the fiscal crisis of the 1970s.

Paterson said that the state's $5 billion budget deficit will grow unless drastic spending cuts and layoffs are enacted.

Earlier this week, Schwarzenegger postponed his plan to reduce the salaries of California's 200,000 state workers to the minimum wage of $6.55 an hour to plug a $17 billion budget deficit.

As a whole, the budget crisis is most comparable to the downturn after the dot-com collapse which prompted budget gaps of $58 billion in 2002, $79 billion in 2003 and $83.78 billion in 2004, says Corina Eckl, director of Fiscal Affairs program at NCSL.

And was the case in those years, the crisis is expected to deepen in the next few years.

"Based on what legislative fiscal directors say, the state fiscal situation is expected to get worse before it gets better and most of them are bracing for tougher times," Eckl tells ABCNews.com.

The crisis has spared some energy and agricultural states, such as Texas, North Dakota, Montana and Alaska.

Record high prices for crops have helped give North Dakota a $740 million surplus this year, and its unemployment rate is nearly half the national 5.5 percent average. The state led the country in personal income growth in the first three months of this year, according to Stateline.org.

High oil prices have helped raise tax revenues and fueled job growth in Alaska and Texas, which could each see budget surpluses of $10 billion at the end of the year.

To plug their budget gaps, most states have avoided raising taxes and resorted to other measures such as spending cuts, trimming state payrolls, tapping reserve funds, using tobacco tax funds and expanding gambling.

Ten states cut Medicaid, Nevada drained its $267-million rainy-day fund and Rhode Island is allowing casinos to stay open 24 hours a day for three days a week.

Some spending cuts have hurt the most vulnerable elements of the population.

Florida cut $332 million from the K-12 classroom budget. And in Illinois, governor Rod Blagojevich slashed $1.4 billion in social services.

As a result, Safe Haven, a facility for homeless and drug-addicted mothers and their children, lost the majority of funding for their "Women with Children Program." The $1.3 million program lost $900,000 of their funding, says Brian Dawson, the founder and manager of Safe Haven.

About 51 of the 120 women and children in the program are being redirected to a local church and at least 13 staffers will be laid off, says Dawson.

"It's devastating," he explains. "These are people who have nowhere to go. You can't just put women and children in the street."