The Fiscal Nightmare Continues for States

States face fiscal stress with relief several years away, a new report from the National Conference of State Legislatures shows.

SAN DIEGO -- Many state legislators were hoping to wake up from this current fiscal nightmare to see revenues recovering in fiscal year (FY) 2010. But according to a new report by the National Conference of State Legislatures (NCSL) released today, lawmakers may have a few more sleepless nights before this fiscal crisis is over.

Leading economists believe that the U.S. economy began rebounding sometime in the third quarter of 2009. But state finances are not expected to recover for at least two years. History shows that state budgets continue to struggle long after a national recession ends. This new report by NCSL is further proof of that fact.

“Even if the recession is over, state budgets are still in appalling condition and are going to be that way for quite a while," said Corina Eckl, fiscal director at the National Conference of State Legislatures. “For many states, revenue recovery is not even in the forecast."

The new report, State Budget Update: November 2009, provides information on all 50 states and Puerto Rico. It is based on data collected from legislative fiscal directors in November 2009.

It includes extensive information on:

• New FY 2010 budget gaps
• Revenue performance for major tax categories (through October 2009 for most states) 
• Spending overruns in FY 2010 
• Projected budget gaps in FY 2011 and FY 2012 and
• A focus question on when states entered the recession and when they expect to exit.

The state fiscal situation continues to generate difficult and often painful choices for lawmakers. They were compelled to close a cumulative budget gap of $145.9 billion in the process of crafting their FY 2010 budgets. But their actions were not enough to cover continued lackluster revenues. Thirty-six states already report another round of gaps since FY 2010 began. The total now hit $28.2 billion, and the fiscal year for most states doesn't end until June.   

“The states are facing nearly unprecedented declines in revenue collections,” said William Pound, executive director of the NCSL. “Coupled with probable declines in federal stimulus support over the next two year, the state fiscal picture is bleak.  We’re heading into an era of retro budgeting, where state spending is receding to levels five to 10 years ago.”

Principal revenue sources -- personal income, general sales and corporate income taxes -- continue to erode. Projections for FY 2010 started off low and some of the pessimistic forecasts have already been missed. For example, in Connecticut, the adopted budget assumed personal income tax collections would decline by 9 percent. In Oklahoma, the certified estimate for FY 2010 was a 7 percent reduction from FY 2009 collections, but collection in the first quarter of the fiscal year were 26 percent below the estimate.

New spending pressures also are starting to pinch state budgets. Eighteen states and Puerto Rico reported that Medicaid or other health care programs were over budget. And California, Maryland, Ohio and Washington reported that education costs were exceeding budgeted levels. Correction spending also is exceeding budgeted levels in many states.

Forty-five states will convene legislative sessions in 2010, and most will have to deal with another round of budget gaps. Thirty-five states and Puerto Rico currently project a cumulative budget gap of $55.5 billion in FY 2011. At least five states report that an official gap estimate is unknown, but indicated that a gap in FY 2011 is expected. Fifteen states do not currently project a gap for FY 2011.

Twenty-three states and Puerto Rico currently project a $68.8 billion budget gap for FY 2012, compared to the $55.5 billion in FY 2011. A total of 17 states expect gaps in excess of 5 percent of their general fund budgets, with 13 states projecting gaps equal to or greater than 10 percent. The largest anticipated shortfalls are in Arizona (30 percent) and Hawaii (28.8 percent). Twenty-seven states do not project a gap for FY 2012.  In most of these states, like Alabama, official estimates will not be made until later. Illinois and South Dakota noted that it was too early to make any estimate on a possible budget gap in FY 2012.

Because the impact of the recession on state budgets has been so severe, NCSL asked legislative fiscal directors to calculate when their state entered into the recession and when they expect to come out of it. Many states do not make such calculations, but those that do, may use different economic indicators. For the most part, fiscal directors used employment data—specifically job losses—to determine an entrance into the recession and the return to employment growth for a projected exit. Michigan entered recession earlier than any other state, reporting that it began losing employment in the second quarter of 2000. Five other states entered into the recession before the nation as a whole. They include California and Florida, two of the states hit hard by declines in real estate values. Only one state—North Dakota—has not felt the impact of the current recession. Thirteen states did not respond to this question.

Estimating an exit date from this recession is a very difficult call. Vermont reports that its economy began recovering in the second quarter of calendar year 2009, even before the nation’s economy began to rebound, earlier than any other state. Twelve states expect recovery in the first half of CY 2010, with nine others expecting it in the second half of the year. Two states—Iowa and Louisiana—think recovery is more than a year away, projecting a rebound in the early months of CY 2011.

“Once it begins, state budget recovery will be a painfully slow process with some hiccups along the way," Eckl said.  “Enormous challenges lie ahead for state lawmakers. State revenues have plunged, and another cliff looms. Lawmakers are holding on with their fingernails.”

This report continues NCSL's long tradition of providing accurate, comprehensive and nonpartisan data on state finances.

Credentialed members of the media may receive a free copy of NCSL State Budget Update: November. Please contact the press room for more information.

NCSL is a bipartisan organization that serves the legislators and staffs of the states, commonwealths and territories. It provides research, technical assistance and opportunities for policymakers to exchange ideas on the most pressing state issues and is an effective and respected advocate for the interests of the states in the American federal system.