Pension Fund Losses Hit States Hard
When total state government revenues across the nation plummeted by a record-breaking 30.8 percent in 2009, the steep investment losses of pension funds proved to be an even bigger drain on state coffers than recession-battered tax collections, according to census data released Wednesday.
States reported $1.1 trillion in total revenues in 2009, down from $1.6 trillion a year earlier — the steepest drop the United States Census Bureau has reported since it began collecting data on state government finances in 1951.
Tax collections fell by $66 billion, blowing a hole in the operating budgets of many states. But the biggest losses will be felt only in the future: states reported a $477 billion decline in what the census calls “insurance trust revenue,” mostly from pension funds but also from funds for unemployment insurance and workers’ compensation.
It is hardly a secret that the bursting of the housing bubble and the Great Recession pummeled state finances. But the new census data, for the fiscal year that ended for most states at the end of June 2009, provides the most comprehensive view yet of the decisions states made in the year they saw their revenues fall by record amounts.
The data told a tale of states struggling to adapt to the new fiscal reality. Thanks to an infusion of federal aid, largely from the stimulus, states saw their general revenues decrease by only 1.4 percent — but general expenditures by state governments rose by 3 percent.
The downturn gave states new priorities and needs. As more people lost their jobs, states found themselves paying $66 billion in unemployment benefits in 2009, up from the $35 billion that they had paid a year earlier.
Donald J. Boyd, a senior fellow at the Nelson A. Rockefeller Institute of Government in Albany, said the new census data showed how state governments as a whole began to respond to the recession in what he called “the year of shock and awe for state government taxes.”
Public welfare spending rose 6.1 percent in 2009, as needs rose during the prolonged recession and the federal stimulus bill provided more money to states for programs like Medicaid and the Temporary Assistance to Needy Families. But at the same time, Mr. Boyd pointed out, “spending on some of the bread-and-butter operations of government came to a virtual standstill” as corrections spending grew by only 1 percent, spending on government administration grew by less than half a percent, and spending on parks and recreation fell by 4.6 percent.
Even though President Obama only signed the stimulus bill into law in February 2009, midway through the fiscal year for most states, the injection of federal money helped offset some of the loss of tax revenue: total federal grants to the states rose by nearly 13 percent that year to $477.7 billion. The stimulus money is set to run out this summer — leaving states facing big deficits next year, since their tax collections, which have begun to rise again, are still far below their pre-recession levels.
The biggest loss recorded — the $477 billion decline in revenues earned by the pension funds and other social insurance trust funds — had little immediate impact on state budgets. But its effects are likely to be felt for years.
“It is truly astounding,” Mr. Boyd said of the losses. “They don’t translate immediately into budgetary stress for states. But what does happen is through the wizardry of actuarial valuations, they will drive pension contributions by states and localities up considerably in the coming years, and that’s true despite the good stock market of 2009, and the relatively good stock market of 2010.”
In his article, Michael Fletcher of the Washington Post reports, Recession-bruised states' revenue sank 30 percent in 2009:
The recession blew a huge hole in the already shaky finances of state governments, causing them to lose nearly one-third of their revenue in 2009, according to a Census Bureau report released Wednesday.
The severe drop in state revenues resulted largely from the big investment losses experienced by state pension funds during the worst period of the downturn. Also, the report said, tax revenues slipped while surging demand from newly needy citizens drained the funds that back unemployment benefits, publicly funded health care and workers' compensation.
Overall, total state government revenue dropped 30.8 percent to $1.1 trillion between fiscal 2008 and 2009, according to the report.
The economy has improved since the depths of the recession as the stock market has rebounded and state tax revenues have begun to tick upward. Still, the recession's lingering effects - particularly a national unemployment rate that is hovering at close to 10 percent - have left the vast majority of states with large budget deficits and increasing service demands.
Governors and state legislators across the country are now confronted with a series of painful choices about future service cuts and tax hikes.
Next year "will actually be the most difficult budget year for states ever," said Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities. "If you look at the gap between the cost of providing public services and the revenue available to provide them, it remains very large," he added.
States' continued fiscal problems are projected to be a drag on the broader economic recovery as state payrolls are likely to shrink and state contracts to private companies are likely to be pared back.
Despite billions in emergency aid from the federal government through various stimulus programs, 46 states had to raise taxes and make cuts to close a combined gap of $130 billion in their current budgets, according to the Center for Budget and Policy Priorities. Moreover, 40 states already have projected budget gaps totaling $113 billion for next year, according to the center.
At the same time, states are grappling with swollen social service caseloads, underfunded pension funds and flat revenues - a situation that will worsen as federal stimulus aid comes to a halt in the coming months.
Future federal help is considered highly unlikely, as Congress and President Obama have put a greater emphasis on reducing spending and trimming the huge federal budget deficit.
The new census report adds to the bleak portrait that has emerged from other studies documenting the damage caused by the economic downturn, while making plain that states are likely to continue struggling fiscally for years.
"This report paints a fairly compelling picture of the impact of the recession on states," said Susan K. Urahn, managing director of the Pew Center on the States. "There are many states predicting that they're not going return to pre-recession levels of revenue until 2014."
In Virginia, revenue declined 28.4 percent to $25.9 billion between fiscal 2008 and 2009. In Maryland, the decline was 15.9 percent. The report did not break out data for the District of Columbia, but the city said it saw a 5.2 percent decline during that span.
Even as revenues plummeted during the downturn, the report said, state government expenditures grew 3 percent. Those increases were mainly in essential services, including safety-net programs and education.
Those forces, coupled with the past reluctance of many state leaders to drastically reduce services or raise taxes, have resulted in large budget deficits in many states. Illinois, for example, has a budget deficit that is equal to 45 percent of its overall budget, according to a recent report by the Pew Center on the States and the Public Policy Institute of California. In California, the gap is equal to 13 percent of the state's total budget. In Arizona, the gap is 15 percent.
Given the growing fiscal problems, many states are moving more aggressively to rein in their costs. Last year, for example, Virginia raised the earliest retirement ages for its workers and limited cost-of-living increases for the pensions of new employees. Maryland, meanwhile, is in the midst of a debate over how to lower its future pension costs.
Tax collections account for almost half of the general revenue of states, and they plummeted by 8.5 percent between the end of fiscal 2008 and 2009, the census report said. The decline was the first year-to-year drop in tax revenues since 2002, according to the Census Bureau.
The decline in tax revenue was partially offset by a 12.9 percent increase in federal aid, which amounted to $477.7 billion in 2009, the report said.
"The basic point is we need to remember how far we fell in 2007, 2008 and 2009," Johnson said. "We're still 12 percent below where we were in revenues at the beginning of the recession, yet all the needs have gone up."
Any way you slice it, state finances are in dire straights. States need to make cuts and take tough decisions on public pension plans. I expect more states to follow Virginia in raising their minimum earliest retirement age. But that won't be enough to undo the damage caused by the recession.