Budget Gaps Triple for '09

The drumbeat of bad fiscal news from statehouses is intensifying. States collectively faced deficits of $40.3 billion in writing their current budgets - triple the $13 billion shortfall states weathered the previous year, a new report released July 23 shows.

"The overall state fiscal condition changed significantly in the past year, and for the most part deteriorated," Corina Eckl, director of fiscal affairs for the National Conference of State Legislatures, said as she released the report during the organization's conference in New Orleans.

State lawmakers knew revenues would drop, but the decline was worse than expected. In April, 23 states had projected budget gaps totaling $26 billion for fiscal 2009, which began July 1 in all but four states. By June that number rose to 31 states, NCSL said.

The troubled budget picture in all but about a dozen energy and farm states is driven largely by reduced revenues, Eckl said. "No single tax is the culprit." Consumer purchases are expected to continue to decline in many states, so the situation is expected to worsen.

Rising energy costs and the housing slump and mortgage crisis also make states nervous that their budgets will bleed red ink. States are saying "we're holding our breath," looking at 2010 and beyond, Eckl said.

The report does not include information for several key states. California, Illinois, Michigan and North Carolina had not completed their budgets by the time the report was written. Arizona, Massachusetts and Ohio also did not have final figures. These missing states represent one-third of the total budget dollars.

California's projected $15.2 billion deficit is among the biggest. The state is without a 2009 budget even though its fiscal year began July 1.

States largely avoided raising taxes, according to NCSL, and instead:

  • Cut spending : 10 states made across-the-board reductions; 12 targeted higher education; 11 cut elementary-secondary education; and 10 cut Medicaid.
  • Trimmed state payrolls : Florida, Maine, Tennessee and Vermont laid off state employees, and nine states imposed hiring freezes.
  • Tapped reserves : 14 states tapped rainy-day or other reserve funds. Nevada used $267 million, virtually eliminating its rainy-day fund; Minnesota used $500 million, nearly half its balance; and Massachusetts used $310 million.
  • Used tobacco funds : Oklahoma borrowed $100 million in excess tobacco tax funds, and Vermont used proceeds from its legal settlement with tobacco companies to help cover Medicaid costs.
  • Expanded gambling : Delaware allowed tracks to operate 24 hours a day, while Rhode Island is letting casinos stay open 24 hours three days a week.

Unlike the federal government, states cannot run deficits, forcing them to find the money or cut spending to balance their budgets.

There is one bright spot. While tourism may be down for some states because Americans are traveling less, states that are a draw for international tourism, such as Florida and Vermont, are benefiting from foreign visitors taking advantage of the weak U.S. dollar.

—Stateline.org editor Diane Fancher contributed to this report from New Orleans.