Uh Oh

By John Latta, Tina Grady Barbaccia and Mike Anderson

The Great Recession has caused the steepest decline in state tax receipts on record. State tax coffers (even adjusting for inflation) are now 12 percent below pre-recession levels (as of third quarter 2010). And, unfortunately for good reason, optimists are nowhere to be found. The economy may be showing signs of life but state incomes, generally, are not.

A new report by the Center on Budget and Policy Priorities (CBPP), a nonpartisan research and policy institute that digs into state and federal budgeting, makes bleak reading, but it is must reading for people trying to assess the coming year as they make plans.

States have slashed and hacked into budgets for the past two years, but they still face large budget gaps, according to the report. “At least 46 states struggled to close shortfalls when adopting budgets for the current fiscal year (FY 2011, which began July 1 in most states),” it says. More pointedly, it also says that “states will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs.”

The report says that states face:

sharply constrained budgets in 2011. To balance their 2011 budgets, 46 states had to address fiscal year 2011 gaps totaling $130 billion, or 20 percent of budgets. Most did so with spending cuts and revenue increases. This total is likely to grow over the course of the fiscal year.

no diminishment in budget problems in 2012. States’ fiscal problems will continue in the current fiscal year and likely beyond. Eleven states are reporting new midyear shortfalls for fiscal year 2011. And most states anticipate significant problems next year. Already, 40 states have projected gaps that total $113 billion for the following year (fiscal year 2012). Once all states have prepared estimates, these are likely to grow to some $140 billion.

2011 and 2012 shortfalls in addition to the gaps states closed in their fiscal year 2010 budgets. Counting both initial and midyear shortfalls, 48 states addressed such shortfalls in their budgets for fiscal year 2010, totaling $191 billion or 29 percent of state budgets – the largest gaps on record.

declining federal assistance. Federal aid to states provided in the February 2009 American Recovery and Reinvestment Act – and to a smaller degree in the August 2010 jobs bill – has lessened state cuts in services and tax increases. But the aid will be almost entirely gone by next year. About $60 billion remains to help with 2011 fiscal problems. By 2012, only $6 billion will remain.

and combined gaps of more than $430 billion since the recession’s start. States have closed budget shortfalls of more than $430 billion for fiscal years 2009, 2010 and 2011 combined. They will continue to face large gaps in fiscal years 2012, 2013 and beyond.

While having at least 40 states looking ahead to fiscal year 2012 and anticipating shortfalls totaling $113 billion is a sobering enough prospect, what’s even more troubling is CBPP’s expectation of that number to grow. The inevitable result of such a trend is more spending and service cuts and, as CBPP points out, “budget cuts often are more severe later in a state fiscal crisis, after largely depleted reserves are no longer an option for closing deficits.”

The report is nothing if not blunt, telling us that “historical experience and current economic projections suggest that due to declining federal assistance, fiscal year 2012 will be more difficult than 2010 or 2011. In fiscal year 2011, states have mostly closed shortfalls that will total some $100 billion after taking federal aid into account. Taking all these factors into account, it is reasonable to expect that for 2012 shortfalls are likely to exceed $140 billion, with only $6 billion in federal Recovery Act dollars remaining available.”

It’s worth noting that the report refers to all Stimulus dollars, and the transportation and infrastructure sector was awarded only a small percentage of those dollars.