Biannual survey concludes that states lag behind recovery

CapitolBeatOK Staff Report

Published: 03-Jun-2010

Findings from a new comprehensive survey of official state government revenue data show fiscal year 2010 presented the most difficult challenge for states’ financial management since the Great Depression.

Although the nation’s economy shows signs of improvement, state fiscal conditions continue to deteriorate, authors of the survey concluded.

Continued grim tax revenue news characterized the biannual report, “The Fiscal Survey of States,” released by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

To address falling revenues and meet balanced budget requirements, states have reduced spending from $687.3 billion in fiscal 2008 to $612.9 billion in fiscal 2010.

The report indicates fiscal 2011will be equally challenging, in spite of modest revenue growth. States will have to make additional spending cuts or increase taxes to close their budget gaps, actions that authors of the report contend will slow the economic recovery.

According to the report, in fiscal 2010, general fund expenditures declined 6.8 percent. However, governors’ recommended budgets for fiscal 2011 forecast a 3.6 percent increase in general fund expenditures.

The increase in state funds in fiscal 2011 is in response to a decline in Recovery Act funds, which are expected to decline by $55 billion, from fiscal 2010 levels, in fiscal 2011. However, even with a 3.6 percent increase in general fund spending, fiscal 2011 spending will still be $52 billion lower than fiscal 2008, a 7.6 percent decline.

Among American governors, Mitch Daniels of Indiana was among the first to project that FY 2011 spending and beyond might be lower, in the states, than it was in 2007 or 2008. Daniels began pressuring for broader spending reductions in the Hoosier state over the past two years, and made some progress in that direction.

In interviews with state fiscal analysts last fall, CapitolBeatOK found that Daniels’ concerns had begun to inform at least some revenue projections in Oklahoma, including beliefs that Oklahoma government might have lower revenue in 2012 than in 2009. In a commentary at the time, this writer reported, “Economists are beginning to refer to the combination of government revenue shortfalls in 2011-12 and inflation fueled by unprecedented federal deficit spending as ‘the cliff.’”

While the new survey of states from NGO and NASBO avoids such startling language as “the cliff,” there is a thread of intensity in the report. Total balances — ending balances and the amounts in budget stabilization “rainy day” funds — are a crucial tool that states heavily rely on during fiscal downturns and budget shortfalls. The balances are estimated to be $38 billion, or 6.2 percent of expenditures, in fiscal 2010, and based on fiscal 2011 recommended budgets, $36.6 billion, or 5.8 percent of expenditures.

“States are still reeling from the downturn after the unprecedented declines in year over year spending in fiscal 2009 and 2010,” said NASBO Executive Director Scott D. Pattison. “States face significant fiscal challenges going forward with the federal Recovery Act funds ending, revenues not expected to be returning to pre-recession levels, and higher demands for many services like health and education.”

States estimate that federal fund tax revenues in 2010 will be $477.4 billion compared to $541.5 billion in fiscal 2008, a decline of 11.8 percent. Governors’ recommended fiscal 2011 budgets forecast collections of $495.8 billion, an 8.4 percent decline from fiscal 2008 levels. These revenue difficulties are highlighted by the 40 states that made mid-year budget cuts in fiscal 2010 totaling $22 billion. Oklahoma was one of those states.

The weakening of state fiscal conditions is reflected in the $296.6 billion in budget gaps faced by states between fiscal 2009 and fiscal 2012. Of the $296.6 billion, $169.3 billion has been closed by states.

“Our best estimate of the remaining state shortfalls for 2010-2012 is $127.4 billion. Because states lag behind national recovery, they expect 2011 to be as bad as 2010, and states will not begin the path to recovery until 2012,” said NGA Executive Director Raymond C. Scheppach. “Spending cuts have been made across the board and governors have been tremendous fiscal stewards. However, it will continue be an uphill climb for states until 2013 when revenues are expected to return to 2008 levels.”

This edition of “The Fiscal Survey of States” reflects actual fiscal 2009, estimated fiscal 2010 and recommended fiscal 2011 figures. The data were collected during spring 2010. More information on the new report is available at the National Governors’ Association website:

NOTE: Editor Patrick B. McGuigan contributed to this report.