States’ Budget Pain Eclipses Last Recession

By: - July 21, 2009 12:00 am

PHILADELPHIA – The current recession – now 19 months long and still going – already has forced states to deal with greater budget shortfalls than they faced in the five years it took them to recover from the last national recession after the 2001 terrorist attacks.

New figures from the National Conference of State Legislatures show that states scrambling to balance their budgets already have closed at least $268.6 billion in gaps between projected spending and revenues since the recession started in December 2007. As a result of the previous eight-month-long recession, states erased $263.8 billion in red ink from fiscal 2002 to fiscal 2006.

The report released Monday (July 20) suggests legislators will face painful budget choices for years to come.

“We have a really bad situation,” said Corina Eckl, NCSL’s fiscal program director, at the group’s annual legislative summit here. “It was like breaking your leg and then getting pneumonia.”

The chief problem, she said,is that state revenues are “dismal.” Nationally, both income taxes and sales taxes are bringing in less money to state coffers.

Florida, for example, is bringing in the same amount of money this year as it did nine years ago. In Michigan, revenues dropped to the same dollar levels – not even accounting for inflation – as the state collected in 1988.

The recession forced state lawmakers to close at least $142.6 billion in shortfalls as they wrote their budgets for fiscal 2010, which began July 1 in most states, on top of $113.2 billion in gaps in fiscal 2009 and $12.8 billion in fiscal 2008, the report said. Several states have reported new gaps in fiscal 2009 and 2010 because of continuing monthly declines in revenue over a year ago, but the report did not give a breakdown.

If last year is any indication, many states that balanced their budgets for fiscal 2010 must brace for their bottom line to be thrown into the red before the year is over, requiring another round of cuts or revenue-raising.

For example, when fiscal 2009 started (on July 1, 2008, for all but four states), states estimated they faced shortfalls totaling $40.3 billion. But by the time the books closed June 30, the total gap between revenues and spending needs had grown to $113.2 billion.

“It seems no matter how pessimistic (forecasters) have been, they haven’t been pessimistic enough,” Eckl said.

To bridge the gaps for the current year, states relied on a mix of program cuts, new taxes and federal stimulus dollars.

Montana, with a projected deficit of $67.1 million, and West Virginia, with a $200 million gap, reported using spending cuts to make up their entire budget shortfalls for the current fiscal year. Texas, on the other hand, filled 97 percent of its budget gap of $3.3 billion with money from the federal stimulus package.

But money from the stimulus package won’t last long, a fact weighing heavily on the minds of legislators and analysts at the NCSL gathering. About $100 billion of the federal economic stimulus package helped states cover budget gaps in 2010; next year states will have about half that amount of stimulus money.

Several states also turned to tax increases to narrow their budget gaps. Using data provided by 36 states, NCSL reported that changes in state tax codes would net at least $24.3 billion in additional revenue for states in the coming year.

Nearly half would come from higher personal income taxes, especially on top earners. Another quarter of the new money would come from new sales and use taxes.

Nearly two-thirds of the states already are projecting budget gaps in fiscal 2011, the report said, and some state officials say the pattern will be repeated in fiscal 2012.

“Because the current state fiscal crisis began in fiscal 2008, many states are looking at a minimum of four to five consecutive years of deep fiscal problems, and maybe more,” the report said.

The report raised questions about how states will make up the gap between revenues and spending after the stimulus dollars dry up.

Connecticut, North Carolina and Pennsylvania still do not have budgets for the fiscal year that began July 1. After missing the budget deadline, Arizona lawmakers have approved a plan but are working out the final details in a special session. California reported a breakthrough late Monday in trying to end its impasse over how to erase a $26.3 billion deficit that opened in the budget it passed in February.

See Related Stories:
Report: State tax revenues see record drop (7/17/2009)
Financial crisis torments states (7/1/2009)
Tracking the recession: Budget deadline looms (6/29/2009)
Reports: State income levels plunge (6/19/2009)
Recession pounds states’ budgets (6/15/2009)
Reports: Bleak state budgets through 2011 (6/4/2009)
State budget gaps top $200 billion; fees, tax hikes in the works (4/24/2009)
Report: Sales tax collections hit 50-year-low (4/14/2009)
Stimulus tax breaks threaten state revenues (4/7/2009)
Report: State tax revenue takes a dive (3/12/2009)

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.