State and city budgets

More and more states are facing rapidly growing budget problems as shown in the graphic below from this report in the Christian Science Monitor.
Some of the "housing bubble" states are being hit the worst. Over the last few years, places such as California and Nevada have seen elected officials transition from one housing crisis to the next - first trying to get people into ridiculously high-priced homes while the bubble was inflating, now trying to bridge a ridiculously large budget gap after the collapse.

There's good news for the state governments though. Now that it looks like the automakers will be turned away from the government bailout trough, they're next in line.

The nation's economic downturn is now squeezing state and city budgets – a financial turn of events that is forcing many mayors and governors to join the growing group of people on their knees asking Congress for help.

The sense of urgency has increased because states have seen their revenue fall sharply over the past two weeks. One early estimate puts the states' mid-year budget gap at $24 billion, double the estimate from the end of last month.

If Congress does not act soon on a fiscal stimulus package, states are warning of plans to lay off librarians, cut healthcare services, and ask unions to forgo raises.
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If the states had their way, they would like Congress to give them help in four areas: help with the growing number of people applying for Medicaid, more funding for the rising unemployed, help with the growing number on food stamps, and an injection of funds to jump-start infrastructure projects that are ready to go.
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Some states are beginning to look at tax hikes to fill the gap. According to news reports, they include Nevada, California, and Oregon.

However, governors are mostly trying to avoid raising taxes in a recession. "The governor does not believe it's smart policy to raise broad-based taxes in an economic downturn and does not believe in making the state more uncompetitive," says Ms. Kempe.

New York's Paterson, facing a $1.5 billion deficit this year, talked spending cuts instead. The governor pointed out New York increased spending between 1990 and 2007 by 130 percent. With Wall Street cutting jobs, state tax revenues are fading quickly. "We can't get around the fact we have to cut spending," he said.

The saga of California and its gubernator is illustrative of the recent change in fortune. Recall that Arnold Schwarzeneggar was elected in a 2003 vote after former Governor Gray Davis was recalled amid horrendous budget difficulties after the dot.com bubble burst.

After almost five years of relatively easy going during the housing boom, conditions have reverted back to those of 2002-2003, only, this time, things could get much worse.