Tennessee: State feels economic squeeze

The worsening economy could create up to a $600 million shortfall in Tennessee’s budget and force more “painful cuts” in state government in the next year, Gov. Phil Bredesen said Thursday.

Gov. Bredesen said the financial crisis on Wall Street is eroding the confidence and wealth of consumers and reducing taxable sales in Tennessee far below what was budgeted only five months ago.

“This certainly is the most serious economic problem in my adult life and, in some ways, is the most dangerous,” the governor said in a meeting with reporters and editors of the Chattanooga Times Free Press. “We’re looking at a significant shortfall in revenue.”

In response to the drop in tax collections, Gov. Bredesen has ordered state department heads to develop plans to cut at least 3 percent from their budgets this year and is considering options for additional measures to save more money this year and next. The governor said he hopes to avoid state employee layoffs, but he may ask schools and local governments to “share some of the pain.”

The economic downturn left Tennessee with a $141.9 million shortfall in the first two months of the fiscal year, and Gov. Bredesen said he fears that the budget shortage likely will grow to at least $300 million and may reach $600 million by next spring.

Taxes down

Tennessee state government derives nearly two-thirds of its state tax collections from its sales taxes, which have been below year-ago levels for most of this year because of declines in sales of automobiles, boats, appliances and other taxable items, according to the state Department of Revenue.

Dr. William Fox, the state’s chief economic forecaster, expects the downturn to worsen as consumers react to the market plunge on Wall Street.

“It’s hard to see any force that is going to be positive for the consumer in coming months,” Dr. Fox said. “I’m afraid that car sales and home starts will be abysmally low through next year, and that will be especially hard on the sales tax collections in Tennessee.”

If the budget shortfall exceeds $300 million, Mr. Bredesen said he would suggest that the state tap some of its reserve funds, including the $750 million rainy day fund and another $550 million in TennCare reserves.

“The good news in this is that we are in a fairly strong position with regard to reserves,” Gov. Bredesen said. “It’s a different set of problems than in 2003 when I came into office and there was a $500 million hole in the budget and there were virtually no reserves.”

Rainy day fund

The governor cautioned the Legislature not to rely upon those one-time reserves to make up for all of the shortfall.

“The challenge is going to be that we are going to have to make some cuts that are going to be painful and the Legislature is going to want to avoid them and spend the reserves instead,” Mr. Bredesen said.

Lt. Gov. Ron Ramsey, R-Blountville, said the state has been fiscally responsible to build up reserves while the economy continued to grow over the past five years. But he said the rainy day fund is designed to help buffer the state during economic shocks like the current credit crisis.

“But the rainy day fund is one-time money, and we can’t use that to fund ongoing programs,” Sen. Ramsey said. “I agree with the governor that we are going to have to make some cuts because unlike the federal government we have to present a balanced budget each year and not balance our budget on the backs of our children or grandchildren.”

Sen. Ramsey said the state’s fiscal condition means that “any bill that comes before the Legislature next year and costs even one extra dime is going to have a hard time getting passed.”

Gov. Bredesen said when he gets the September tax numbers in the first week in November “we’ll see where we are and then take some more actions.”

“We’ve had a hard hiring freeze on since May, and that has helped us a lot because we have about a 10 percent turnover in our staff every year,” he said.

Gov. Bredesen said he hopes to avoid employee layoffs in state government.

“I guess this is the blue-collar background in me, but I just think people really need to have a job to hang on to, and if I can possibly work it out so we can deal with this through turnover and voluntary buyouts, I would like to do that,” he said.

Democratic lawmakers in Washington are considering another $300 billion economic-recovery package that could provide more money for highways and bridges, extended benefits to unemployed workers, additional Medicaid assistance and other aid to cash-strapped states.

Gov. Bredesen said he wouldn’t turn down such money, but he isn’t counting on getting it either.

“I think we’re much better as a country if they get their house in order, and it’s hard to see how they do that if they are sending out a few hundred billion dollars in economic stimulus,” Mr. Bredesen said. “I’m happy to buckle down and do my job down here if they do their job up there.”