State Finance Directors Warn of More Trouble Ahead

By SARA MURRAY
Wall Street Journal
November 13, 2009

Michigan and California are likely to face a fresh round of budget woes when federal stimulus funds used as a fiscal crutch dry up, finance directors for the states said Friday.

Short-term budget gaps have battered states as revenues plummeted during the recession. Aided by about $250 billion in funds from the stimulus package expected through the end of next year, states managed to close the gaps this year. But both finance directors, speaking at a Pew Center on the States event in Washington, were pessimistic about their states’ futures beyond fiscal 2011.

“We’re facing a cliff in 2011 when stimulus dollars run out,” said Mitchell Bean, director of the Michigan House Fiscal Agency. “There is not an end in sight, even in recovery.”

As of July 2009, California’s budget shortfall was 49.3% of its general funds. States have considered drastic options to fill such gaps.

“I looked as hard as I could at how states could declare bankruptcy,” said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. “I literally looked at the federal constitution to see if there was a way for states to return to territory status.”

There were no bankruptcy options, and the legislature chose to cut back sharply on education and health care to fill the gap. Mr. Genest already predicts the 2011 shortfall will outpace the projected $7 billion gap. It is a smaller deficit than this year’s gap, but the choices will be more difficult because so many cuts have already been made.

Mr. Genest estimated that, eventually, 40% of the state’s budget would go to the state Medicaid program, 40% to education, 10% to debt service and 6% to retiree medical services and pension—leaving little left for anything else, such as the state’s corrections system.

This article continues at WSJonline.

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