"If you look at some of the basics of the economy -- unemployment, the stock market decline, the decline in consumer spending -- there is some reason to fear this crisis will be worse," said Nicholas Johnson, an analyst with the Center on Budget and Policy Priorities.
Local governments, in particular, may get hammered harder this time around. In 2001, Johnson said, cities and municipalities, flush with cash from high property tax rolls, were able to pick up the cost of services that states had abandoned. But that will be more difficult now because declining home values have dragged down property tax revenues.
States have generally been conservative with their spending priorities since the last downturn, even as the housing boom swelled their coffers. Johnson noted that states, taken as a whole, set aside record reserves: At the end of the 2007 fiscal year, their total reserves of about $69 billion equaled about 10.5% of their combined budgets.
In Washington last week, House Democrats addressed the issue, saying they would consider giving aid to struggling states as part of a $150-billion economic stimulus package. Illinois Sen. Barack Obama, the Democratic nominee for president, has also proposed a multibillion-dollar aid package for state and local governments. Republican John McCain's campaign did not respond to multiple inquiries about their candidate's plans to help states.
The reversal of fortunes has been dizzying for states such as Arizona. Only two years ago, the state was sitting on a $1.5-billion surplus, but the housing collapse sent the economy into a tailspin. When Gov. Janet Napolitano signed the budget this summer, it was already tightened to close a $1-billion deficit. The state drained its reserve funds, took $18 million that was to be used for maintenance at small airports and instituted a hiring freeze.
But the financial situation has worsened in the last couple of months, and Arizona faces an additional deficit of as much as $800 million.
Napolitano earlier this month said that all expenditures over $50,000 would be reevaluated in light of the worsening financial picture. Officials warned that reductions in services may be inevitable. And they don't know when the bad times will end.
Historically, fast-growing Arizona has been among the first states to recover from a recession, said the governor's spokeswoman, Jeanine L'Ecuyer. "But we're in a whole new ballgame now," she said.
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richard.fausset@latimes.com
nicholas.riccardi @latimes.com
Fausset reported from Atlanta, Riccardi from Denver.
