Reports: Bleak State Budgets Through 2011

Even if the national recession ends this year as many predict, state budgets will likely be in the red for the next two years, with budget gaps topping $230 billion as tax collections of sales, personal and corporate income lag, two new reports show.

More than half the states reported that revenues from every major tax source, through April, were below last year’s collections, the National Conference of State Legislatures said in a report released June 3.

Some of the revenue drops are eye-popping. For April, which is the significant month for personal income tax collections, NCSL found that collections were more than 40 percent below the prior year’s level in Connecticut, Massachusetts and North Carolina, 43 percent in Michigan and 44 percent in Arizona.

“The fact that more than half the states reported breakdowns in all significant tax categories heightens alarm,” NCSL said.

With company profits down and recession-weary Americans buying less, revenues fell well below expectations in 38 states in 2009, the National Association of State Budget Officers and National Governors Association said in their latest joint report released June 4. NASBO Executive Director Scott D. Pattison said the revenues were below “even the most pessimistic forecasts.”

Coping with the shortfalls, half of the states cut funding to schools, health care for the poor and correction programs to close $46 billion in budget gaps in 2009, NASBO and NGA said.

Even with the billions of federal stimulus dollars flowing to states, all but nine had budget gaps for fiscal 2009, and 37 are reporting shortfalls for the new budget that begins July 1 for most states, according to the NASBO report that puts total state deficits at $230 billion between fiscal 2009 and 2011.

“It’s clear we have two, possibly three years more of difficult times for states,” said NGA Executive Director Raymond C. Scheppach.

NCSL estimates that states will confront deficits totaling $236 billion from fiscal 2008 through 2010 with at least $45 billion looming in 2011. “The national recession is pummeling state revenues,” NCSL said in its report.

The state fiscal reports come as Federal Reserve Chairman Ben Bernanke sounded cautiously optimistic that the U.S. recession would end this year in his testimony before Congress June 3. “We continue to expect overall economic activity to bottom out, and then to turn up later this year,” he said in his remarks.

But state fiscal conditions historically lag behind national economic recovery. The year after a recession ends is typically when state budgets are hit hardest. That’s because by then, Medicaid rolls have swelled as more individuals become unemployed and lose their health insurance.

Although not mentioned in either report, the situation is most dire in California, where Republican Gov. Arnold Schwarzenegger’s plan to close the state’s $24 billion budget deficit would eliminate government health coverage for low- to moderate-income children, scrap the state’s welfare-to-work program, release thousands of prisoners early, cut state employees pay by 5 percent and shutter 220 state parks.

Elsewhere, Republican Arizona Gov. Jan Brewer this week recommended temporarily raising the sales tax by a penny to help erase a $4 billion shortfall. And Kentucky, which has already raised taxes on cigarettes and its world-famous bourbon, has called a June 15 special session to address a $996 million shortfall.

NASBO and NGA found that corporate income tax collections, which account for about 8 percent of states’ general fund, tumbled 15 percent lower overall compared to the previous year. Personal income tax collections, which account for 40 percent of state funds, were nearly 7 percent lower and sales tax, which account for 33 percent of state funds, fell 3 percent.

To balance their 2009 budgets, states targeted certain programs: 26 states reduced funds for elementary schools, 31 cut higher education, 22 cut public assistance, 25 cut both Medicaid and corrections, 15 cut transportation and 25 cut personnel, NASBO and NGA said.

Looking to the 2010 budget year that begins July 1 for all but four states, 27 states proposed cutting elementary school funding, 28 cut higher education, 23 cut public assistance, 25 targeted both Medicaid and corrections, 19 cut transportation and 28 cut personnel, according to NASBO and NGA.