Slumping Economy Hits Prosperous States
By Stephen C. Fehr, Staff Writer
The economic downturn pounding most of the country is beginning to show up in many of the states that financial analysts had said were seemingly immune from the recession.
Only five months ago, many analysts said that states that produced commodities, such as oil, natural gas, coal, metals and agricultural products, were well-off because of high commodity prices.
Those same states were largely unscathed by the subprime mortgage crisis: Alaska , Iowa , Indiana , Montana , Nebraska , North Dakota , Oklahoma , South Dakota , Texas , West Virginia and Wyoming .
But since the summer, prices of all major commodities have declined and so have tax revenues in many of those states. The value of state employee pension funds and other investments has also dropped. Unemployment is rising in those states, although not as sharply as in other states. Tourism - a key industry in several of the well-off states - is down as people are putting off travel. Natural disasters put an added strain on Iowa and Texas this year.
Iowa and Nebraska officials now are projecting shortfalls in the coming budget year. South Dakota will avoid a gap but only if lawmakers agree to Gov. Mike Rounds' (R) request to raise property taxes, hike several state fees and spend down reserves. Indiana finished the last fiscal year with a surplus, but to help balance this year's budget Gov. Mitch Daniels (R) has ordered a 7 percent across-the-board spending cut.
Even officials in the healthiest of states are growing increasingly uneasy about the national recession.
Economists in North Dakota , which has benefited for most the year from high oil and grain prices, say the downturn probably will hit their state in 2009, though not as severely as elsewhere. Oil-rich Oklahoma also is solid financially, but just in case, Gov. Brad Henry (D) has asked state Treasurer Scott Meacham to lead a study of the state's economic health "to mitigate any damages from the national and international level."
In West Virginia, which collects a severance tax on coal and natural gas, economists are forecasting an increase in the unemployment rate from 4.9 percent to 6 percent, enough to push the state into recession and the risk of a budget shortfall. Still, it won't be as bad as other states.
"We are clearly in stiff drink territory," West Virginia University economist George Hammond recently said at the state's annual economic outlook conference. "But just one stiff drink. The national economy is in the two or three stiff drinks stage."
Montana , another one stiff drink state, is reporting job losses due to declines in tourism and the mining and timber industries. Gov. Brian Schweitzer recently proposed a two-year budget for fiscal 2010-2011 that would trim spending by $100 million and keep $250 million in a rainy-day fund "in case the worst happens," the Democratic governor said.
"We actually have the money today," Schweitzer said. "The challenge is not to over-commit our spending. Just like many Montana families, we're going to have to tighten our belts."
Alaska began the year with no financial worries. As recently as July, when oil prices reached $145 a barrel, the state was so flush in revenue that lawmakers approved a $6 billion spending plan. In September, the state mailed out dividend checks of $3,269 to eligible residents from its $40 billion oil wealth savings account.
Then oil prices fell $100 a barrel and the oil royalty account plunged to $28.6 billion in value. State officials say the dividend probably will drop considerably in 2009. Meantime, Gov. Sarah Palin (R) said Dec. 4 that for the first time in many years, Alaska 's budget for the coming fiscal year will show a decline in spending because of the falloff in revenue.
Still, Palin stressed, oil taxes generated surplus revenues last year because of high oil prices.Nearly all of Alaska's general fund revenue comes from taxes and fees on oil.
"There is no need for panic," said Palin, who is planning to release her spending plan on Dec. 15.
Iowa has a different problem. For most of the year, the state's farming, manufacturing and financial services industries have been adding jobs and pumping tax revenue into the state treasury. But after the Wall Street meltdown, financial services companies with operations in Iowa reported losses, and the national downturn slowed demand for products manufactured in Iowa , such as recreational vehicles and washers and dryers.
Corn and soybean prices also have been declining. Damage from spring flooding and tornadoes reduced tax revenues by $35 million, officials say, though overall revenue still is growing.
The state has about $600 million in emergency reserves, but Gov. Chet Culver (D) has ordered about $40 million in spending cuts from this year's budget in order to finish with a $5 million surplus. Officials are projecting a budget shortfall in the next fiscal year of as much as $500 million.
Texas Gov. Rick Perry (R) also has asked state agencies to curb spending as a precaution against the national downturn. Even with the fall in oil and gas prices, Texas still has an $11.7 billion budget surplus.
But half of that surplus could be needed for school property tax cuts, increased costs in Medicaid and damage to the state from Hurricane Ike. Layoffs are spreading throughout the state, most recently in Texas ' chemical industry, which employs thousands of workers. Perry has abandoned his plan to return leftover tax dollars to residents, and says he is concerned about the decline in value of the state worker pension fund.
Most governors would love to have Wyoming Gov. Dave Freudenthal's problem. He recently told lawmakers that because of the national economy, they should not plan on receiving $400 million in additional revenue that state economists projected Wyoming would get in the coming two-year budget cycle.
Not to worry. The state has so much money that Freudenthal (D) still proposed $500 million in new spending for the next two years, including a property tax break and pay raises for state workers.