When President-elect Barack Obama met with America's governors earlier this week, he got an earful about the recession-induced budget crisis they face. On Thursday those words of woe were backed up by a fresh report on the rapidly deteriorating condition of state finances. Revenues are dropping so fast that state budget cutters can't keep up, according to a report released by the National Conference of State Legislatures (NCSL). States that collectively cut $40 billion in spending to balance their budgets over the summer are now facing an additional $32 billion shortfall as tax receipts come in below estimates, the report said. And the fiscal year after that running from July 2009 through June 2010 could be even worse, with a projected $65 billion gap between legislated spending and incoming revenue, a figure calculated with only half the states providing an estimate. "Even states that were showing strong performance are moderating their forecasts," says Corina Eckl, NCSL fiscal affairs program director.
In domino fashion, revenue shortfalls are leading to cuts in services around the nation and across the board. At least 10 states, including Nevada, New York, Ohio and North Carolina, have reduced budgets by as much as 7%, with 10 more states considering such action. The pain is being felt from community colleges to prisons, from fire departments to courthouses, with major state responsibilities like Medicaid and elementary-school education taking hits.
More program cuts seem inevitable as states are squeezed by rising costs for health care and education on one side and falling revenue on the other. According to a November survey of legislative fiscal officers included in the report, 18 states are seeing personal income tax come in below target, 26 states are watching sales tax fall below forecast, and 21 states are finding corporate income taxes to be less than what they expected. "State lawmakers knew that revenue growth was slowing, but no one could have foreseen just how dramatically the situation would change in a few short months," the report notes.
The 12 states with budgets still on track include Alaska, Arkansas, Montana, North Dakota, Oklahoma, Texas and West Virginia. Many of those states have economies tied to energy or agriculture two sectors that held up better than most for longer but have been showing weakness this year as the price of commodities has plummeted. State finances tend to lag the national economy, so strength so far is no guarantee things will stay rosy. Of legislative fiscal officers surveyed, including one in Puerto Rico, 26 were pessimistic about the revenue outlook through next summer; last year at this time, none were. Of the remaining officers, 19 were concerned, 6 saw the outlook as stable, and none were optimistic.
As states struggle with budget shortfalls, their attention is sure to remain focused on what help the Federal Government might lend. When the governors met with Obama, they pressed him to pump money into state economies including funding projects to build schools, bridges and other sorts of public works and found a receptive ear. "To solve this crisis and to ease the burden on our states, we're going to need action and we're going to need action swiftly," Obama said in a speech at the meeting. "This Administration does not intend to delay in getting you the help that we need." Based on the latest data, by the time he takes office that need could be significantly higher.