Governors are Proposing Further Deep Cuts in Services, Likely Harming Their Economies
Less-Harmful Alternatives Include Revenue Increases and Rainy Day Funds
While nearly every state has cut spending in the past few years, some additional cuts are inevitable for 2012: because of the lingering effects of the long and deep recession, tax collections in most states remain well below pre-recession levels and lag far behind the growing cost of maintaining existing services. But the cutbacks in services that many governors have proposed appear to be greater than necessary. Many of the governors proposing very deep cuts are failing to utilize other important tools in their budget-balancing toolkit, such as utilizing reserves or raising new revenue to replace some of the revenue lost to the recession. Some governors are even adding to the cutbacks needed by reducing corporate taxes or other taxes – an ineffective strategy for improving economic growth that likely will do more harm than good.It should go without saying, but many Republicans do not seem to understand, public employees pay taxes and spend their income as consumers. No doubt some job cuts might be a good thing. As Republicans are apt to do, they have gone too far. They are making drastic cuts which are and will continue to delay a full economic recovery.
Increased federal aid, which played an important role in limiting the depth of cuts in services like education and health care in recent years, does not appear to be available this year. Congressional leaders have indicated that they are unwilling to extend the temporary funding for states first enacted in early 2009 and partially extended in 2010. That leaves states with fewer options, one of which is deeper spending cuts.
A total of 48 states have released initial budgets for the coming 2012 fiscal year. That is all the states that will release budgets this year. The two remaining states — Kentucky and Wyoming — operate on a two-year budget cycle that does not require the release of a full budget this year. A review of the initial budget proposals released in the 48 states shows that:
Nearly all states are proposing to spend less money than they spent in 2008 (after inflation), even though the cost of providing services will be higher. Most state spending goes toward education and health care, and in the 2012 budget year, there will be more children in public schools, more students enrolled in public colleges and universities, and more Medicaid enrollees in 2012 than there were in 2008. But among 44 states which have released the necessary data, 35 states plan to spend less in 2012, after inflation, than they did in 2008, and only two — Alaska and North Dakota — expect to spend significantly more. Total proposed spending would be 9.4 percent below 2008 inflation-adjusted levels. 
The majority of states — at least 39 of 48 — are proposing major cuts in core public services. 
At least 21 states have proposed identifiable, deep cuts in pre-kindergarten and/or K-12 spending. The governor of Mississippi proposes education spending that fails for the fourth year in a row to meet statutory requirements enacted to ensure adequate funding in all school districts. (The three previous years of underfunding have cost over 2,000 school employees their jobs.) The Texas budget proposal would e liminate pre-K funding for nearly 100,000 mostly at-risk children — over 40 percent of the state’s pre-kindergarten students.
At least 25 states have proposed identifiable, deep cuts in health care. In Arizona, the governor’s budget would eliminate health care for 100,000 poor individuals. Washington’s governor proposes eliminating affordable health care for more than 60,000 low-income residents. Wisconsin’s governor proposes canceling health insurance coverage for about 70,000 people. 
At least 20 states have proposed major, identifiable cuts in higher education. Pennsylvania’s governor proposes to cut funding for the state’s system of higher education by more than 50 percent, resulting in less state funding for the higher education system than it received in 1983, the year in which the state established consolidated funding. Arizona would cut state support for public universities by one-fifth; when combined with previous cuts, this would reduce per-student state funding 46 percent below pre-recession levels. California’s governor proposes to reduce funding for the state’s two university systems by $1 billion. For one of those two systems, the University of California system, the cuts would bring nominal spending down to the fiscal year 1999 level — when the system had 31 percent fewer students than it does today.
At least 15 states have proposed layoffs or identifiable cuts in pay and/or benefits for public workers.
At the same time, seven governors facing shortfalls are proposing large tax cuts, mostly for corporations; the loss of revenue from these tax cuts in 2012 means that those states would have to enact even deeper spending cuts to balance their budgets. For example:
Florida’s governor proposes to cut the corporate income tax to 3 percent from 5.5 percent in the coming fiscal year -- costing the state an estimated $459 million in fiscal year 2012 -- and eliminate it by 2018. On the spending side, the governor proposes very large cuts in education, health care and other areas, as described below.
New Jersey’s governor proposes a variety of tax cuts to begin in 2012, including reducing by 25 percent the corporate minimum tax paid by 93 percent of the state’s corporations and increasing to $1 million from $675,000 the amount that can be bequeathed to heirs tax-free. Taken together, these tax cuts will cost $200 million in fiscal year 2012; by 2016, the cost will have more than tripled to $700 million. At the same time, the governor has proposed substantial pay decreases for state employees, applied for a waiver from federal Medicaid rules that likely would reduce significantly the number of people with access to the program, and other state spending cuts.
Arizona’s Governor Brewer proposed a tax package that included reducing the corporate income tax rate to 5 percent from 6.98 percent and reducing commercial property taxes by 25 percent. The package was signed into law on February 17 and will cost the state $38 million in fiscal year 2012, or 4 percent of the state’s 2012 budget shortfall. By fiscal year 2018, the cost of the tax cuts will balloon to $538 million, half of which will result from the corporate tax rate cut.
Florida’s Governor Scott proposes to cut the corporate income tax to 3 percent from 5.5 percent in the coming fiscal year – costing the state $459 million in fiscal year 2012 – and fully eliminating the tax by 2018. He also would reduce motor vehicle fees by $236 million. Together, these cuts equal 19 percent of the state’s projected 2012 shortfall. Scott would also significantly ratchet down Florida’s existing cap on local property taxes, without providing additional state aid to compensate local school districts for their revenue loss.
Maine’s Governor LePage proposes eliminating in 2012 the state’s alternative minimum income tax. In 2013, he would also lower the top income tax rate, for income above about $50,000, to 7.95 percent from 8.5 percent. And in 2014 he would double from $1 million to $2 million the income exempted from the state’s estate tax. These cuts would cost the state $203 million in the coming two-year budget cycle and would widen the two-year budget gap by 25 percent.
Michigan’s Governor Snyder would eliminate the state’s current major business tax, replacing it with a flat 6 percent corporate income tax. Snyder proposes to offset the revenue lost from reduced business taxes by increasing personal income taxes, for example by eliminating of the state’s Earned Income Tax Credit for low-income working families and taxing pension income. In the 2012 fiscal year, these personal income tax increases would not fully offset the business tax cuts, leaving Michigan with an additional $254 million hole to fill in 2012. In 2013 and after, the proposed tax increases would offset the cuts, but provide no additional revenue to help fill the state’s budget gap.
New Jersey’s Governor Christie proposes a variety of tax cuts to begin in 2012, including reducing by 25 percent the corporate minimum tax paid by 93 percent of the state’s corporations and increasing to $1 million from $675,000 the amount that can be bequeathed to heirs tax-free. Taken together, his proposed tax cuts would add $200 million to the $10.5 billion budget gap for fiscal year 2012; by 2016, the cost will have more than tripled – to $700 million.
In North Carolina, Governor Perdue proposes cutting the state’s corporate income tax rate to 4.9 percent from 6.9 percent, beginning in calendar year 2012. This tax cut for corporations would cost the state more than $400 million over the upcoming two-year budget cycle, and eat up 25 percent of the revenue protected by her proposed extension of the state’s current sales tax rate described above. The tax cut is equal to about 10 percent of the state’s projected two-year shortfall.
In Wisconsin, Governor Walker proposes $82 million in new corporate tax cuts. For instance, he proposes allowing corporations to claim as a tax deduction a greater share of the losses they have incurred in past years. Together with other tax cuts enacted with the governor’s support earlier this year, the total revenue loss to the state is about $200 million over the next two year budget cycle, increasing the shortfall that the state will need to close. Walker proposes to cover $41 million of this shortfall by scaling back the state’s Earned Income Tax Credit for low-income working families. A single working parent with two kids and earnings of $25,000 would see his or her annual income tax bill more than double, from $193 to $394.
Job and Pay Cuts for Public Employees
At least 15 states have proposed layoffs or specific cuts in pay and/or benefits for state workers. (These cuts are in addition to workforce cuts already implemented in 44 states since the recession began. Since August 2008, state and local governments have eliminated more than 400,000 jobs.)
Colorado Governor Hickenlooper’s budget would raise the state employee salary contribution by 4.5 percent.
Connecticut Governor Malloy’s budget relies upon $2 billion in personnel related savings over the biennium to be negotiated with the state’s public employee unions. The governor puts forth a number of ideas for achieving those savings including freezing state employee wages, moving state employees to a health plan similar to that provided to federal workers, extending 3 day a year furloughs until the end of the biennium, and raising the retirement age. Malloy warns that failure to reach agreement on how to achieve these savings would result in the dismissal of thousands of state workers, and significant additional program cuts.
Florida ’s Governor Scott would reduce the state workforce by 8 percent, requiring around 8,100 layoffs and the elimination of about 2,000 vacant positions. Scott would also require $5,000 health insurance premium contributions from state employees.
Georgia’s Governor Deal proposes to eliminate about 14,000 state government positions, most of which are currently vacant, requiring about 200 layoffs.
Public employees in Idaho would receive no raises next year, under Governor Otter’s proposed budget.
Governor Jindal of Louisiana proposes eliminating more than 4,100 positions, nearly half of which are currently filled. He also would extend a suspension of merit-based salary increases for state employees for one additional year and increase the amount certain state workers contribute to the state retirement system.
Nebraska’s Governor Heineman offers no pay raises for state employees in FY2012. For some state employees this will be the second year in the row with no pay raise.
In Nevada, Governor Sandoval proposes a 5 percent salary reduction for executive branch public employees, including K-12 and university teachers and staff. He also orders a salary freeze for state employees scheduled for increases.
Governor Lynch of New Hampshire proposes to eliminate 1,100 positions in state government, requiring 255 layoffs. The governor also would eliminate state contributions to public employee retirement accounts, leaving local governments to either pick up another $50 million in retirement contributions, or cut benefits for public workers.
Governor Christie of New Jersey would increase the amount some public employees contribute to their retirement; for a portion of these employees, the increase would more than double the required contribution. He also would eliminate cost of living increases for current and future retirees, calculate pension benefits over more years of income, raise the normal age of retirement to 65 from 60, and rescind a 9 percent benefit increase enacted in 2001. The Governor also would change the way public employees contribute towards their health insurance, requiring that they pay 30 percent of the cost of their health policy instead of making a 1.5 percent salary contribution. (The average state health insurance policy costs about $14,000, which means the average public worker would pay $4,200 instead of 1.5 percent of her or his salary.)
New Mexico’s Governor Martinez’ budget would require K-12 instructors to contribute 1.5 percent of their salaries to their retirement; for all other public employees the contribution would be 3.5 percent of their salaries. Last year, the 1.5 percent salary contribution was imposed upon public employees as a one-time measure. The Governor’s budget would extend the contribution for teachers and more than double it for all other employees.
Governor Chafee of Rhode Island would require many state employees to pay 11.75 percent of their paycheck for their pensions. Currently, state employees pay 8.75 percent and teachers pay 9.5 percent. Chafee also wants to cut salary costs by an additional 3 percent, in part by negotiating further salary and benefit concessions from workers.
South Carolina’s former Governor Sanford, who issued a budget for next year before leaving office, proposed a 5 percent salary reduction for all state employees with annual salaries over $35,000, and would require all state employees to choose two holidays without pay. It is unclear whether current Governor Haley will support these cuts.
According to news accounts, the state’s leading expert on school finance in Texas has estimated that the initial budget’s proposed cuts in state support for public education could force school districts to lay off as many as 100,000 teachers and other education workers.  Other cuts in the plan would eliminate almost 10,000 state jobs, such as prison guards and child protective service investigators.
Wisconsin Governor Walker has proposed sweeping changes to state employee policies and pay. In a current year budget bill, Walker proposes to strip many workers of their collective bargaining rights. Many other workers would have their rights seriously restricted. His bill also would require state workers to make a 6 percent salary contribution to their pensions and to pay nearly 13 percent of the average health premium costs, effectively cutting their pay. Walker’s budget proposal for the upcoming budget cycle extends these compensation cuts over the next two years. He would also freeze state employee salaries for the next two years, and cut over 3,000 positions.
Although governors’ budgets often do not delineate which public employees will lose their jobs, most state and local government workers fall into one of the following categories: schoolteachers and other school employees, university workers, police officers, firefighters, corrections workers, highway and transit workers, public hospital employees, public health workers, public utility employees, and parks and environmental workers.