State Budgets: $28 Billion Short This Year

Thirty-six states face budget shortfalls totaling $28 billion in the fiscal year that began just five months ago, according to a new 50-state report. The assessment predicts another $56 billion in shortfalls across 35 states next fiscal year and $69 billion in shortfalls across 23 states the year after that.

The analysis by the National Conference of State Legislatures is the latest to point to a long period of money problems ahead for state governments, which historically have faced budget crises even after national recessions are declared over. Many economists, the report notes, believe the current recession ended sometime in the third quarter of this year.

According to NCSL, Oklahoma and Arizona must deal with the nation’s largest budget gaps this fiscal year – at 18.5 percent and 18 percent of their general fund budgets, respectively. They are followed by Illinois (16.5 percent), Hawaii (13 percent) and New Mexico (11.8 percent).

Lawmakers in most states will return to work early next year only to cut spending for the third consecutive legislative session. Budget shortfalls over the coming two fiscal years will be even more pronounced than this year because federal stimulus money that helped prop up states will run out, NCSL said.

The report chronicles many of the same stresses on state budgets that other reports recently have highlighted, including the erosion of revenues from falling income and sales tax collections and rising expenses associated with growing Medicaid enrollments. Common is the experience of Colorado, which attributed $561 million of its current $591 million budget gap to falling tax revenues, with the other $30 million coming from increased Medicaid costs.

In particular, some states have been unprepared for how steeply their revenues have fallen.

“Even pessimistic (revenue) forecasts have been missed,” NCSL says, pointing to Connecticut, which balanced its current budget on the assumption that tax revenues would decline by 9 percent. Actual revenues declined by 16 percent through October.

Only one state – Alaska – said it was “optimistic” about revenues in the remainder of the current fiscal year, and that is primarily because of rising energy prices, on which the state is heavily reliant.

The NCSL study also asked state fiscal analysts when their states entered recession and when they expect to emerge. Not all states answered the questions, but those that did underscored how different states’ experiences have been during the downturn.

Six states – California, Connecticut, Florida, Idaho, Michigan and Rhode Island – reported entering into recession before the nation as a whole, led by Michigan, which charts its recession all the way to 2000. North Dakota, by contrast, is the only state “that has not felt the impact of the current recession,” NCSL said.

Vermont reported that its economy began to recover in the second quarter of 2009 – earlier than any other state reported. Six more states – Alabama, California, Montana, New Hampshire, Texas and Washington – expect to recover before the end of the year. Twelve others expect to recover in the first half of 2010, while nine said they would recover in the second half of 2010. Iowa, Louisiana, Tennessee and Wyoming said they would be among the last states to recover.