As State Revenues Tick Upward, Budget Gaps Remain

After enduring two years of crippling budget deficits, states may have slightly better times ahead, according to a new report issued yesterday by the National Conference of State Legislatures. 

Nearly every state expects to collect more revenue in the 2011 fiscal year than in 2010, the report says. In total, general fund revenues are expected to grow by an average of 3.7 percent in 2011, compared with an average decline of 1.5 percent in 2010. “While not out of woods,” the report says, “the performance of revenues in many states has officials looking up instead of down.”

Still, the report paints a picture that is far from rosy, particularly as the federal stimulus program winds down. In the fiscal 2011 budgets they’ve already enacted, the states are projecting that budget gaps of more than $12 billion may open up. Looking ahead to 2012, they’re projecting collective deficits of $72 billion. “States really do have few concrete plans to deal with the end of the federal stimulus,” says Corina Eckl, NCSL’s director of fiscal affairs.

In the near term, the big question is whether Congress will extend Medicaid assistance included in the economic stimulus law passed last year. When developing their fiscal 2011 budgets, dozens of states counted on additional federal dollars coming through. If the aid doesn’t materialize, California, New York, North Carolina and Texas all would see fiscal 2011 budget gaps of more than $1 billion open up ( see chart ).

The report was released as thousands of state legislators and staff convened in Louisville for NCSL’s annual legislative summit. At the opening session, “Does Congress Really Care About the States?” U.S. House Speaker Nancy Pelosi and U.S. Senate Republican Leader Mitch McConnell addressed the question of federal assistance in strikingly different ways.

Pelosi called for an extension of the Medicaid help, known as “FMAP,” and called on state legislators to lobby the U.S. Senate in support of such an action. “When Congress passed the $87 million in enhanced FMAP funding in the recovery act, it helped keep cops on the beat, teachers in the classroom and helped address the health needs of your constituents,” Pelosi said.

McConnell expressed concern about increasing state reliance on federal funding — now the single greatest source of state and local revenue, he noted — and urged a return to federalist principles.

“For literally years, states have allowed the federal government to tighten its grip and extend its reach into their territory,” McConnell said. “I get it. No one wants to say no to free money. The problem is none of it is really free. Every dollar comes with a condition.”

Among the NCSL report’s other key findings:

• States faced a collective budget gap of $83.9 billion during enactment of their fiscal 2011 budgets — a slight improvement from NCSL’s widely reported March estimate of $89 billion.
•  Nearly half of states reported fiscal 2011 gaps at 10 percent or more of their general fund budgets. The states with the largest gaps were Nevada (45 percent), New Jersey (28 percent), Arizona (27 percent), Maine (26 percent) and North Carolina (25 percent). Two-thirds of states already forecast another round of double-digit budget gaps for fiscal 2012.
• States have reported a total of $537 billion in budget gaps between fiscal 2008 through fiscal 2013.
• The final months of fiscal 2010 brought significant improvement in some states. In Maryland, revenues began coming in above forecast levels. Connecticut’s revenue picture improved to such an extent that it expected to close out the year with a surprising $242 million surplus. And in Idaho, economic forecasts indicate that conditions have stabilized and employment has leveled off.
• States closed out fiscal 2010 with an average ending balance of 5.7 percent, a decline from 7.0 percent at the end of the previous year. Texas and Alaska have accumulated sizable reserves and heavily skew the results. When they are excluded, the average ending balance falls to 1.8 percent.