July 23, 2008
What a Difference a Year Makes: More States are Facing Budget Woes
FY 2008 stands out in sharp contrast to FY 2007 for a large majority of states.
NEW ORLEANS - One year ago, states appeared to be financially stable. Based on revenue and expenditure forecasts, policymakers anticipated that FY 2008 balances would fall, but the decline in state finances has been worse than expected, according to a new report released today.
The National Conference of State Legislatures' State Budget Update: June 2008 is based on information collected from legislative fiscal directors in June and early July. It covers the revenue and expenditure situation for all 50 states and Puerto Rico. The report includes information on budget gaps in FY 2008, revenue performance (through May 2008 for most states), projections of FY 2009 budget gaps and actions states took to close them. It also includes a special section on sectors of the economy having the greatest impact on state finances.
More states reported gaps for FY 2009 than for FY 2008, with the cumulative total more than tripling from about $13 billion to more than $40 billion. While many states have closed or are in the process of resolving their imbalances, the most notable exception is California, where actions to close the $15.2 billion (15 percent) gap are still under consideration. No single tax stands out as the primary culprit for anemic revenue performance, the principal cause of state budget problems, but many states seem to be concerned about sales tax collections.
"Not every state is facing fiscal challenges," said William Pound, executive director of the National Conference of State Legislatures. "States that have significant portions of their tax bases tied to natural resources seem to have escaped major budget problems." Several of these states report tax collections are much higher than expected.
Since the recession of the early 1990s, lawmakers largely have avoided raising taxes to help close budget gaps. Instead, they have focused on cutting spending and tapping reserves to get through the downturn. This year was no exception. Although a few states levied tax or fee increases, the principal focus was on cutting spending. Other actions included:
- Four states will reduce the size of the state workforce, in some instances by not filling vacant positions.
- Nine states reported a hiring freeze.
- States like Minnesota, Massachusetts and Nevada have tapped their rainy day fund or some other state fund.
Survey respondents were asked to identify which industries or sectors of the economy were having the greatest negative impact on state budgets:
- Financial services are a concern for 20 states.
- Manufacturing is a problematic economic sector for 22 states.
- Housing has been identified as problematic in 17 states.
Specific circumstances also are driving state economies. For instance, Iowa reported that horrendous flooding in June and devastating tornadoes in late May caused millions of dollars of damage, interrupting manufacturing operations and damaging crops. All sectors of the state’s economy are expected to be affected. Nevada is particularly concerned about gaming activities and their effects on state revenues. Michigan reported that it continues to suffer drops in wages and salary employment, with 2008 marking the eighth consecutive year of decline.
The industries or sectors of the economy having the greatest positive impact on state budgets:
- The leisure and hospitality sector is robust in 11 states.
- National resrouces are strong in 10 states.
- Agriculture is doing well in eight states.
As state lawmakers were enacting FY 2009 budgets, state fiscal conditions worsened. It is unclear if FY 2009 spending plans will remain stable, especially if programs that grow during economic downturns (like Medicaid) start exceeding their budgeted levels. The same revenue problems that undermined FY 2008 budgets are affecting FY 2009 budgets as well.
The report will be unveiled and handed out at a press confernce on Wednesday, July 23 from 11:45 to 12:15 central time in room 213 at the Morial Convention Center. Reporters may also participate in the press conference by dialing 888-687-4838, passcode is 32838580.
Members of the media may obtain a free copy of NCSL's State Budget Update by contacting NCSL's Press Room. To purchase your copy of the update or a copy of the Tax Actions 2008 Preliminary Report, visit the NCSL Bookstore.
NCSL is the bipartisan organization that serves the legislators and staff 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.
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