As Many States Face Widening Budget Deficits, S&P Cuts California's Credit Rating

The fiscal situation of U.S. states remains dire, with budget deficits of at least 39 states surpassing earlier estimates, by $34bn for the fiscal year FY 2010 (July 2009 - June 2010). According to The Center of Budget and Policy Priorities, U.S. states faced an initial projected shortfall of $159bn in FY 2010. However because of the deteriorating economic conditions, tax collections have fallen short and additional deficits of $34bn have emerged for the fiscal year 2010 (ending in June). To top this, the Center projects a combined shortfall of $180bn for fiscal year 2011 (which begins in July of this year), and $120bn for FY 2012. According to the Center:

States will struggle to find revenue to support critical projects for a number of years to come, as continued high unemployment keeps state income tax receipts low. Combined with diminished household wealth due to fallen property values, consumption will remain depressed, keeping sales tax receipts low. At the same time states will face increasing demand for Medicaid and other essential services. This means that after taking into account the federal Recovery Act dollars that are likely to remain available for fiscal year 2011 (approximately $40 billion), states will still have to close shortfalls of some $260 billion for fiscal years 2011 and 2012 combined.

What is most unfortunate in this situation is that many states have had to balance their budget by cutting essential spending in areas such as education and caring for the elderly. According to Boston.com

Mary Ann Neureiter, who runs an adult day care center in suburban Atlanta, saw her state aid cut in half in 2009. The Cambridge House Enrichment Center once offered state-subsidized care to 10 low-income clients with disabilities such as Alzheimer’s. It’s now down to three, and Neureiter fears the funding could dry up altogether this year. “It’s heartbreaking because I foresee, in the coming year, it’s going to get even worse for services for the elderly,’’ she said.

Additionally:

• At least three states, Alabama, Georgia, and Mississippi, have cut K-12 education funding.
• Idaho and New Mexico have cut higher education.
• Colorado and Indiana have cut Medicaid provider rates.
• Massachusetts’ governor has announced cuts to TANF, school transportation, child care, and mental health services.
• Mid-year gaps were closed in part with employee layoffs and furloughs in Georgia, Hawaii, Iowa, Maryland, Missouri, New Mexico, and Virginia.

Aa another indicator of the rapidly worsening state fiscal situation, S&P on Wednesday cut California's credit rating on $64bn of general obligation debt to A- from A, citing “severe fiscal imbalance and the impending recurrence of a cash deficiency if the state’s revenue and spending trajectories continue.” In addition S&P put California on a negative outlook meaning that its ratings could be cut further if the fiscal situation does not improve.
Gov. Arnold Schwarzenegger is scrambling to close a $20-billion budget gap, and has requested $7 billion in aid from Washington. However the odds of California receiving the aid appear slim as David Axelrod, senior adviser to President Barack Obama, said in an interview. “We recognize they have enormous problems,” But we can’t solve all of those problems from Washington.”
According to S&P's analyst Gabriel Petek, "There could be days in March when they go into a negative cash position and the government might pay other obligations with IOUs, as it did last summer, or the state might require a short-term loan from Wall Street".
No wonder President Obama scrambled to have banks repay the TARP, so that some of that money could potentially be redirected to bailout the states.