Déjà vu all over again

From The Beacon, January 2010, Vol. XXXVI, #1

While the pages of our calendars are turning over into a new year, the upcoming budget season will certainly feel like “déjà vu all over again,” to quote Yogi Berra.

The end of 2009 will not mark the end of our fiscal crisis. In fact, Massachusetts and nearly every state and local government in America will face even greater budget woes, something that many residents will find hard to believe and understand as they read and hear economists declare that the recession is ending and the nation is beginning a long and slow recovery.

The problem stems from the delay between the beginning of a recession and the impact on tax revenues. In general, tax collections remain steady for about six months or more after a recession begins and the economy contracts. Public entities then experience revenue crashes that don’t turn around until a recovery has been going strong for six months or more.

We all know what’s happened during the past year. Local and state revenues have plummeted, public workers have been eliminated from the payroll, services have been cut deeply, reserves have been exhausted, local and state taxes and fees have been increased, and structural budget deficits have ballooned.

The news gets worse. This past summer’s fiscal 2010 state budget cut municipal and education aid by $724 million, and the governor then imposed $37 million more in mid-year local aid cuts in October. While the economic recovery means that more mid-year cuts are not likely, this year’s state budget is balanced using $2 billion in one-time money, with $1.7 billion coming from the federal stimulus aid bill passed last winter. This federal stimulus aid has masked the full devastation of the 2007-2009 recession, one of the worst in our nation’s history.

Next year’s structural budget gap for the Commonwealth is projected to be at least $3 billion, with only a fraction of one-time funds remaining to mitigate the pain. Even though tax revenues are stabilizing and will inch up in a year or two, the immediate loss of over $1 billion in federal aid in the fiscal 2011 budget will uncover an uglier situation than anything we have experienced to date.

So even as talk increases about better days ahead, cities, towns and states are not out of the woods. In fact, they are still lost deep in the fiscal forest, with no clearing in sight. The only way that communities and states will get closer to the recovery instead of experiencing a devastating year ahead will be if the federal government passes another significant fiscal relief package for local and state governments.

Mark Zandi, the chief economist for Moody’s Economy.com, shared his analysis of the situation with the Pew Charitable Trust’s Stateline.org project last month, saying “it’s vital [that] states get additional stimulus. If no more aid is forthcoming, then they’ll be cutting jobs, programs and raising taxes…because their fiscal situation continues to deteriorate more rapidly. So states are going to have a huge hole beginning in 2011 when the current stimulus runs out. I suspect they’ll be cutting spending and raising taxes long before reaching that cliff. States have run out of budget tricks [and] various ways of managing through it. I don’t know if states have many more rabbits in the hat they can pull out.”

Before breaking for recess in December, the U.S. House of Representatives passed a second jobs and economic recovery assistance package that included at least $600 million in additional federal relief for Massachusetts, primarily by extending higher federal Medicaid reimbursements for another six months. The bill also includes $25 billion to be distributed to all states to protect the jobs of teachers, police officers and firefighters. It is unclear how that money would be distributed and shared with municipalities, but the intent is clear – to shore up local budgets and prevent further layoffs and fiscal distress.

While President Obama and the House are in alignment on the jobs and fiscal relief bill, the U.S. Senate remains a mystery. It is unlikely that the Senate will act on the bill early this month. We are fortunate to have Senators Kerry and Kirk fighting for additional funding, but the fate of the package is in the hands of other senators who disagree with adding to the federal deficit.

It is imperative that this federal logjam be broken. Otherwise, our budget “déjà vu” may be even worse the second time around.