NGA Foresees Long Downturn for States

WASHINGTON — States already hurting from declining revenues and increased spending needs could continue to face financial troubles over the next three to four years as the nation's economic downturn drags on, the National Governors Association's executive director said yesterday.

"We're really fearful that we could be in a three- or four-year slowdown," the NGA's Ray Scheppach told reporters during a teleconference as he unveiled the Fiscal Survey of States, a biennial report that examines state budget trends.

The future of the economy will depend on many factors, including how the housing sector fares and how much higher oil prices climb, Scheppach said.

In any case, states will likely continue to turn to the debt market instead of using their own revenues to pay for projects, said Scott Pattison, executive director of the National Association of State Budget Officers, which helped compile the data for the report along with the NGA.

"If you look at the data from the past few years, there has been a gradual increase in the issuance of debt," Pattison said. "I would expect continued year-over-year growth of debt issuance."

The NGA and NASBO collected data from fiscal 2007 and 2008, plus appropriations for fiscal 2009, to determine trends in state budgets for the report. All but four states' fiscal years begin July 1, according to the report.

Already, 13 states have been forced mid-year to reduce the fiscal 2008 budgets they had enacted by $5.2 billion, with Florida and California making the most extensive budget cuts of $1.5 billion and $848.9 million, respectively, the report said. That is in stark contrast to fiscal 2007 when only three states made cuts and fiscal 2006 when two cut budgets.

The report found 18 states are projecting negative budget growth for fiscal 2009 and four states are estimating negative growth for fiscal 2008 budgets. By contrast, only one state reported negative growth for fiscal 2007.

NGA and NASBO officials said they do not believe the economic downturn has reached a turning point. Further, the report points out that even if the economy stabilizes or improve, experience shows states typically need a few years to recover.

The downturn following the terrorist attacks on Sept. 11, 2001, forced states to make the greatest budget cuts in fiscal 2002 and 2003, when 37 states made mid-year budget reductions totaling $14 billion and $12 billion, respectively, according to the two groups.

"It's not as bad, per se, as the economic downturn post-9/11, but we're very concerned about the future," Pattison said.

At the same time, spending pressures "continue as demand for increased funding of programs, such as Medicaid, persist and states deal with looming long-term issues, such as funding pensions, demographic shifts, and maintenance and repair of infrastructure," the report said. "Unfortunately, when revenue growth declines as a result of a weakened economy, spending pressures for social programs and health care increase."

Medicaid spending from state funds is expected to top the expenditures list yet again, with a 4.4% increase in growth proposed 2009 budgets; more than four times the rate of growth for the overall general fund.

In fiscal 2008, total Medicaid spending is estimated to increase by 6.4% with state funds increasing by 6.3% and federal funds by 6.7%.

In fiscal 2007, total Medicaid spending grew by 4.6% of state funds and 5.3% of federal funds.

Even with the weakening fiscal 2008 state conditions, about half of the states had proposals to increase coverage to the uninsured in fiscal 2009.

But states have been most hurt by a slowdown in revenue collections, according to the report. For fiscal 2008, estimated tax collections of sales, personal income, and corporate income are 1.7% higher than fiscal 2007 collections, the report said. But "this average contains a range of performance with a considerable weakening of the sales tax and a decrease in corporate tax," the report said.

Revenue estimates are below expectations in 20 states, on target in 14 states and exceed expectations in only 15 states, according to the report.

Scheppach said unemployment numbers generally peak near the end of a downturn and that states have yet to face a drop in personal income tax collections as a result of rising unemployment, which could decrease revenue expectations further.

Many states are addressing their budget gaps by making targeted or across-the-board cuts in services, tapping into rainy-day funds, or imposing lay-offs and hiring freezes, according to the report.

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