Presentation | February 2009

Economic Status of the States

Sujit CanagaRetna

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Presentation at The Council of State Governments 2009 Leaders Meeting, Washington, D.C.

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The current U.S. economic outlook is very grim. While this is not news to those here today, the goal of my presentation is to provide you with data and information – based on my research and review of a host of different sources – related to the gravity of our economic challenges and some insights into what states are doing to cope with these tests.

The U.S. economy faces monumental challenges of the magnitude not experienced since the Great Depression. Our economy has been ensnared in a recession since December 2007, a recession that has already exceeded the average length of all post World War Two recessions. It is expected that it will last well into 2009, making it the longest since the 1930s. In terms of output, U.S. gross domestic product, GDP, shrank by 3.8 percent in the final quarter of 2008, the worst GDP showing since the first quarter of 1982. The national unemployment rate soared to 7.6 percent in January 2009, the highest rate since September 1992 and the U.S. economy lost nearly 600,000 jobs last month, the largest one-month job loss since December 1974.

There are several disturbing features about the current recession but the most alarming development is the fact that the U.S. economy faces concurrent crises on multiple fronts, a development not experienced in many decades. The roots of the current recession are traceable to the collapse of the housing and construction sectors and the mortgage meltdown that began in 2006. In the aftermath of the 2001 recession, the housing and construction sectors played an increasingly important role in the economic recovery and ensuing growth in so many states. Yet, these sectors have completely collapsed and homeowners across the country face tremendous pressures in meeting their mortgage payments or are looking at mortgages that are greater than the value of their homes. For instance, there were 3.2 million foreclosure filings (default notices, auction sale notices and bank repossessions) on 2.3 million properties in 2008, an 81 percent increase from 2007 and a 225 percent increase from 2006. More than 7 percent of households in Nevada received at least one foreclosure notice in 2008 followed by Florida (4.52 percent) and Arizona (4.49 percent). California, Colorado, Michigan, Ohio, Georgia, Illinois and New Jersey, were the remaining states with the top 10 foreclosure rates in 2008.

The complete collapse of the housing and mortgage sectors has resulted in an output crisis – or GDP crisis – that has resulted in severe revenue shortfalls at the government, corporate and individual levels. In enacting their FY 2009 budgets, 29 states bridged shortfalls that amounted to $48 billion; an additional $51 billion in gaps have opened up in 42 states during the middle of the current fiscal year. At the individual level, U.S. personal income growth slowed sharply for the latest period available, the third quarter of 2008, with all states except New Jersey and Wyoming experiencing a slowdown compared to their performance in the previous quarter, the weakest personal income performance since the first quarter of 1994.

This recession is also characterized by a major crisis in the banking, financial and credit sectors with the nation's economic landscape littered with the carcasses of storied but now defunct financial entities such as Merrill Lynch, Bear Stearns, Lehman Brothers and banks such as Washington Mutual. The freezing up of the credit markets, given that credit is the lifeblood of the U.S. economy, has posed severe restrictions to governments, businesses and individuals. For a number of years now, credit flowed very easily but starting in October 2008, when the credit markets went through their initial round of "freezing," accessing credit has proven to be very difficult. While the situation has improved in recent months, state and local governments, which had come to enjoy years of cheap and easily accessed credit, still continue to face credit challenges, a development that threatens long-term projects and dampens economic activity. New bond issues tumbled by more than 9 percent in 2008 with fourth quarter volume plunging by more than 33 percent, the lowest for any quarter since the first three months of 2002. At the individual level, limited credit availability was attributed to the more than 37 percent drop in U.S. auto sales in January 2009, compared with January 2008, a 28-year low.

The current recession has also sparked a crisis of confidence among investors, businesses and consumers. Given that consumer spending accounts for over two-thirds of all U.S. economy activity, the deepening recession has only further throttled consumer confidence. The U.S. Consumer Confidence Index inched in January 2009 to a historic low of 37.7. For the 2008 calendar year, the Dow Jones Industrial Average lost 34 percent of its value, the worst year for the index since 1931 and the technology-laden Nasdaq posted its worst year ever, a nearly 41 percent drop. The 2008 losses extinguished $7 trillion in shareholder wealth, the gains of the last six years. While any one of these negative developments – output declines, revenue shortfalls, credit freezes, confidence drops – has the potential to stall the economy, all of them operating in concert – as they are now – has completely destabilized the U.S. economy.

Even before the extreme economic turbulence of fall 2008, states were looking at a very depressed financial picture. In the aftermath of the 2001 recession, state expenditures fell sharply and despite the revenue recovery in many states, state general fund spending remained below pre-2001 recession levels as a share of gross state product. For the upcoming fiscal year 2010, the situation has plunged to staggering depths and budget deficits are already projected in 43 states with initial estimates of these shortfalls totaling almost $94 billion. While the full extent of 2010 deficits are forecasted to equal $145 billion, when combined with the remainder of the current fiscal year and fiscal year 2011, or over the next 30 months, the cumulative budget gaps are estimated to total a mind-numbing $350 billion to $370 billion. Already, 23 states are forecasting double-digit gaps as a percent of their general funds in their FY 2010 budgets with Nevada (30 percent), Arizona (29.8 percent), California (26 percent) and New York (24 percent) ranking high in this category.

On the unemployment front, states are looking at sizable challenges as unemployment rates soar to heights not seen in decades. Based on December 2008 figures, the latest available, 22 states have an unemployment rate that is at or greater than 7 percent. The five states with the highest unemployment rate are Michigan (10.6 percent), Rhode Island (10 percent), South Carolina (9.5 percent), California (9.3 percent) and Nevada (9.1 percent). What is most disturbing about the current downturn is that states like Georgia, North Carolina, Florida and Nevada, all states that enjoyed bustling economic growth and ranked among the fastest growing in the nation for so many years, currently have unemployment rates above 8 percent.

As the impact of the recession intensifies, Medicaid rolls continue to surge by significant rates too. By January 2009, the Medicaid populations in a number of states grew by 5 percent to 10 percent compared to the previous 12 months, and, in many states, the growth rate was at least double what it had been in the previous year. States with the largest increases in enrollment between 2007 and 2008 included Utah (10.8 percent), Colorado (10.5 percent), Florida (10.4 percent), Wisconsin (9.5 percent) and Oregon (8.5 percent).

In terms of state responses to deal with the massive deficits looming on the horizon, policymakers have and are pursuing four broad strategies: One, slashing spending; two, tapping rainy day funds; three, expanding gaming; and four, raising taxes.

Cutting spending is the favored approach among many governors and lawmakers and some of the programs that have been cut include public health programs (28 states), K-12 education (26 states), programs for the elderly and disabled (22 states), colleges and universities (32 states) and state workforces (38 states).

State rainy day funds are projected to reach $35.3 billion at the end of fiscal year 2009 and it is expected that states have and will continue to tap these funds to balance their budgets this year and the next.

Expanding gaming is also popular because it enables states to raise revenue without raising taxes. While at least a dozen states added new gaming options or expanded existing ones in 2008, already in 2009, states as diverse as Hawaii, Ohio, Wyoming, Nebraska, Maine, Kentucky, Pennsylvania, are considering both approaches. Hawaii's move in this connection remains the most dramatic since the state, along with Utah, is one of two states without any form of gaming.

In terms of raising taxes, as politically radioactive as this strategy is, several governors and lawmakers have proposed and are considering this approach to bridge shortfalls, a demonstration of the dire fiscal situation states find themselves in. For instance, in California, lawmakers grappling with huge gaps agreed to raise income, sales and vehicle license fees while in Wisconsin, Governor Doyle wants a new tax on hospital revenue and a tax on oil companies. Then, the governors of Hawaii, Idaho, Massachusetts, Oregon and South Dakota have all called for hiking their state's gas tax while Nevada's governor, who promised not to raise taxes when he was first elected in 2006, has said "nothing is off the table." In New York, Governor Paterson's December 2008 budget called for 88 new fees and a host of other taxes to bridge a budget shortfall of $15.4 billion. More recently, New York lawmakers proposed increased personal income taxes for the highest-earning New Yorkers. In Georgia, the House is considering a multi-year, $25 billion, statewide sales-tax increase for transportation projects throughout the state. A Texas Senate bill proposes allowing urban areas in the state to vote on levying local taxes and fees to build road and rail projects. Florida lawmakers are also sifting through 60 years of exemptions to the state's 6 percent sales tax, which cost the state about $12 billion per year.

There are proposals and enactments in at least 16 states to hike cigarette taxes including Mississippi, Florida, South Carolina, Kentucky, Wisconsin, Arkansas, Illinois and Rhode Island to fill gaping budget holes or fund programs, calling in some cases for levies more than four times as high as current amounts. Senate President Basnight in North Carolina has proposed raising cigarette and alcohol taxes in his state.

Another important factor that makes the state fiscal outlook quite daunting is that the current revenue shortfalls and huge budget gaps masks a number of enormous fiscal challenges states will have to grapple with in such areas as healthcare, education, public pensions, emergency management, infrastructure, unemployment insurance and transportation. States will have to contend with these significant challenges once the current crisis abates.

In the midst of all this doom and gloom, there are several bright sparks on the state economic landscape that offer promise for thousands of high-tech, high-wage jobs in line with the 21st century:

  • In Georgia, the state's only solar power cell manufacturing plant (Suniva) opened in December 2008 in suburban Atlanta and company officials already have lined up $1 billion in sales agreements with overseas solar module manufacturers;
  • In Tennessee, in Clarksville, just north of Nashville, construction will soon begin on a $1.2 billion plant slated to employ up to 800 people in the production of polycrystalline silicon, the basic element of solar-electric panels and computer chips;
  • In Oklahoma, the state is touting its decades-long expertise and experience in aviation and aeronautical technology and providing incentives to attract wind manufacturing companies;
  • A number of other states are also aggressively pursuing wind energy, both as economic development and clean energy strategies. Governor Schweitzer in Montana cites a wind turbine plant in Butte that will employ as many as 600 workers while Governor Ritter in Colorado touts a Danish company that will employ 2,500 by 2010 at four turbine manufacturing locations in his state. Similarly, in Newton, Iowa, a wind-turbine plant seeking to employ 500 workers began operations in fall 2008 at a shuttered Maytag factory;
  • In Mississippi, plans are underway to begin operation by 2015 of a $2.2 billion clean-coal power plant in Kemper County (near Meridian);
  • In North Carolina, 30 miles northeast of Charlotte in Kannapolis, the $1.5 billion N.C. Research Campus opened in October 2008. The location of the facility is the site of the century-old Pillowtex textile factory that closed in 2003 and the 350-acre biotech hub is projected to generate 30,000 direct and indirect jobs when fully operational;
  • In Groton, Connecticut, the submarine builder Electric Boat recently announced an expansion in its workforce of up to 200 engineers, 50 designers and 400 trade staffers to meet the demand for new Virginia class submarines for the U.S. Navy;
  • In Missouri, the University of Missouri is establishing a new 500-acre research park in Blue Springs that would expand ties with bioscience and alternative energy companies. The U.S. Department of Homeland Security's December 2008 decision to locate the $563 million federal National Bio and Agro-Defense Facility in the vicinity of Kansas State University remains a huge boost to the state;
  • In January 2009, IBM announced that its two newest global service delivery centers will be in East Lansing, Michigan and Dubuque, Iowa. At Big Blue's newest Michigan location, IBM expects to create up to 1,500 direct and indirect jobs in five years and employ another 1,300 people in Dubuque within two years;
  • Finally, in Charleston, South Carolina, the closure of the U.S. Navy base in 1996 was a serious economic blow to the city and the state. Yet, after a decade of decay, some 340 acres of the former base is now part of a 3,000 acre redevelopment effort that will see an injection of $3 billion over 20 years in high-tech ventures.

In closing, as foreboding as the severity of the ongoing recession has been and will be on both the national and state economies, the resiliency of states to bounce back from these dismal times by both initiating and continuing a number of promising economic development efforts remains impressive. Redirecting the energies of our economy – beginning at the local and state levels along with engaging the federal government as a partner – will eventually generate broad-based, sustained economic growth in all sectors of the country. Thank you for your attention.