Analysis: States turn from furloughs to layoffs

By Lisa Lambert

WASHINGTON (BestGrowthStock) – For U.S. states, the practice of furloughing employees to save money is going out of fashion while the more drastic step of laying off workers is becoming a more popular cost-cutting tool.

U.S. state and local governments employ around twice as many workers as the country’s manufacturing and construction sectors combined, so the switch to layoffs risks swelling already high unemployment in the United States.

“I can confirm that states are now moving to layoffs they had hoped to avoid,” said Philippa Dunne, who polls state leaders for the economic newsletter she co-edits, the Liscio Report. “To me, this is terrible timing because private hiring remains anemic, so piling on state and local layoffs is dangerous.”

The Center on Budget and Policy Priorities, a think tank tracking states’ economies, found states’ cumulative budget shortfall will likely reach $140 billion in fiscal 2011, which starts Thursday in most states, the largest shortfall since the recession began in 2007.

Because all states except Vermont must balance their budgets they will have to find ways to raise revenue or places to cut spending. This year may be tough because states have few places left to slash and taxpayers, badly bruised by unemployment and home foreclosures, have no appetite for extra taxes and fees.

According to a recent report from the National Governors Association and the National Association of State Budget Officers, 22 states used furloughs while attempting to close budget gaps in fiscal 2010, sending groups of public employees home without pay and closing offices.

That was nearly even with layoffs, with 25 states and Puerto Rico cutting positions during fiscal 2010.

To close budget gaps in fiscal 2011, only 13 states are adopting furloughs, or a little more than half the number that used the unpaid days in fiscal 2010. On the other hand, 19 are planning to turn to layoffs.

“The scale of the crunch that states — and local governments for that matter — are under suggests furloughs are not enough,” said Nicholas Johnson, a director of the state fiscal project at CBPP. “You can’t just tell everyone to take a day off here and there and expect that will remedy the situation.”

BIG SECTOR, BIG NEWS

Since the beginning of the recession, 200,000 state and local employees have lost their jobs, according to CBPP. Just since December, 81,000 state workers have been laid off, according to the U.S. Bureau of Labor Statistics.

In May there were 5.2 million people employed by state governments and 27.7 million by local governments, according to BLS. That compares to 5.6 million workers in construction and 11.6 million in manufacturing.

“This is a big sector and trouble in it is big news, whatever one may think about government spending,” said Dunne.

That is especially true when the U.S. jobless rate has been above 9 percent for 13 straight months. Analysts polled by Reuters expect Friday’s jobs report to show that the rate rose to 9.8 percent in June.

Furloughs and layoffs increased in fiscal 2010 as tax revenue plunged dramatically due to high unemployment rates, the housing bust and continued economic recession.

The high initial dependency on furloughs showed states had not expected such a huge drop in revenues, said NASBO Executive Director Scott Pattison.

“Furloughs become more necessary when you have to quickly cut because money is coming in less than what you planned,” he said, adding that states are seeing more stable levels of revenue, allowing them to forecast more accurately.

Recent government data showed state and local revenue improved during the first quarter of 2010 from the first quarter of 2009, but only by 0.82 percent. Analysts do not expect revenue to return to pre-recession levels for years.

THE FURLOUGHS FIX

Furloughs are intended to save states money and public employees their jobs. However, the money savings are in dispute.

“The furloughs were seen as some help in the short run. The problem is that you don’t save as much money as you hope,” said NGA Executive Director Raymond Scheppach, adding that states have to pay for benefits even if they skip a day of salaries.

According to California’s budget office, the state saved $2.8 billion through its 46 furlough days from February 2009 to June 2010.

But California’s Franchise Tax Board found the blanket furloughs may have also cost the state money. The board said in a February report that furloughing 5,300 of its workers cost the state seven times more money than it saved because the tax collectors were not around to take in revenue.

The board also said prisons and other facilities that cannot be shuttered for the day must hire temporary workers or pay current employees overtime. Meanwhile, furloughs at many agencies, such as the Department of Motor Vehicles, save no money but slow down service on days when offices are open.

Currently, in Washington state the public employee union is suing to scrap 10 furlough days the state legislature hoped would save $10 million. The state has “no way of determining the savings,” the union said in a legal filing.

But regardless of the potential savings furloughs offer, many states have had no choice but to lay off employees.

“There are just going to be a lot more terminations as opposed to the furloughs going forward because it’s so bad,” said Scheppach.

(Editing by Andrew Hay)

Analysis: States turn from furloughs to layoffs