State, City Governments Following Private Sector Employment Cues

Jan. 30, 2009— -- Taking a cue from the private sector, state and city governments have started announcing job losses and furloughs as they struggle to close budget gaps without resorting to crippling tax hikes.

New York City Mayor Michael Bloomberg warned today that the only way the city would be able to avoid large-scale layoffs -- more than 20,000 employees -- would be if there were concessions from the state, the unions and city leaders.

"You can't spend what you don't have," Bloomberg said. "If they [the unions] are cooperative, we'll do it one way. If they are not, then we'll do it another."

The mayor's preliminary 2010 budget included requests for the state to restore $700 million in cut education funds, for the unions to accept between $500 million and $700 million in pension benefit savings and for a $900 million sales-tax hike.

Failing those agreements, he said, the city would be forced to lay off as many as 23,000 city workers, 15,000 of them teachers. The city is facing a $4 billion budget gap.

The mayor's dire news and California Governor Arnold Schwarzenegger's announcement Thursday that up to 238,000 state employees will be furloughed to help cut the state's growing deficit came as no surprise to economists who have been expecting such moves for the better part of a year.

"It's very predictable," Mark Zandi, chief economist for Moody's Economy.com, told ABCNews.com. "Most states and many municipalities are running large deficits." The private sector has been hemorrhaging jobs for months, having announced the layoffs of tens of thousands of employees in the last two months alone. Now municipal governments are recognizing that such initiatives are a logical next step.

Forty states now have announced projected budget shortfalls, Zandi said, and even states like North Dakota and Alaska, which are rich in energy and agriculture, are feeling the pinch.

Though layoffs perpetuate the vicious cycle of a continuing faltering economy and strain on government services, Zandi said such initiatives are, unfortunately, a reasonable next step for governments that have already blown through their rainy day funds and reached borrowing capacity.

"This is a very tough time for our city and our nation," Bloomberg said at the outset of his one-hour budget presentation. And at its close he said, "[But] I would rather play New York City's hand than anybody else's."

The city projects $5 billion less in tax revenues in fiscal 2010 -- which begins in July --- than in fiscal 2008. Bloomberg said the preliminary budget proposal aimed to close the gap without harming public safety, welfare or education.

Tightening California's Belt

California's furloughs, due to start Feb. 6, are expected to save the state $1.3 billion. It's a drop in the bucket against the state's projected $42 billion shortfall, but every bit helps, according to Schwarzenegger press secretary Aaron McLear.

"None of this is ideal," he told ABCNews.com.

Every month that passes without a budget agreement between the governor and the state legislature means more difficult choices, McLear said. Schwarzenegger and legislature leaders have been tied up in negotiations over a potential 18-month budget ahead of the state's next fiscal year, which starts on July 1.

"The governor's been saying the longer we wait to solve the problem the bigger it's going to get," McLear said.

He pointed to a budget proposal in November to furlough employees one day a month. That was rejected, and now it's two days a month.

The furloughs apply only to employees in the executive branch. They will occur on the first and third Fridays of each month and the state will gain additional savings those days from utilities and maintenance as the mass furloughs will mean closure of several state offices.

Exempt are some highway patrol officers, but not public safety and emergency preparedness employees.

"If California businesses and families are tightening their belt, the state government needs to do the same thing," McLear said.

If Bloomberg's proposed plan doesn't work the way he wants it to, the job losses would amount to amount to about 6.5 percent of the city's workforce.

In his weekly radio show today, Bloomberg said he was more pessimistic than the official financial forecast.

"If things get worse, then all bets are off," he said. "If labor doesn't come through with things we need, then all bets are off. The city budget is made up of a few things we can't control, and labor."

New York City's latest round of financial woes is largely caused by a sharp decline in tax revenues, forecast to drop by $800 million in 2009 and another $2 billion in 2010.

"All governments are facing up to the fact that tax revenues are declining because the economy is going down," Bloomberg said during the show. "People are getting hurt. Some people are losing their jobs, not everybody, some people are losing their homes, not everybody, but everyone is worried. And they have a right to be."

Looking to Obama Package for Relief

Budget deficits were already a problem back in the fall, when several states announced that the Wall Street crisis had wiped out large chunks of their pension investments -- hundreds of millions of dollars in some cases.

Zandi said that while no state government is immune to budget deficits, some are worse off than others. Florida is facing an especially tough future, he said, calling it "arguably the weakest economy in the country."

Florida's estimated budget shortfall is a reported $2.3 billion.

That state's biggest worry, Zandi said, is the housing crisis, with migration having not only stopped but reversed, which is extremely unusual.

The Sunshine State, he said, is "getting creamed in the collapse."

So what's the solution?

Zandi said the states' best hope right now is President Obama's $819 billion stimulus package, approved by the House Wednesday and up for a vote in the Senate next week.

If the package passes, Zandi said, states will face "tough choices, but they won't be as dire."

And the trickle-down of funds, he said, would likely be very fast, possibly as early as spring or summer.

States would see federal aid not in the form of lump sums to their general funds, but rather through a variety of programs including Medicaid, education and public works projects.