Four Years of Pain Ahead

WASHINGTON - States are facing at least four years of slowed revenue growth, reduced spending to levels not seen for nearly 30 years, and forced budgets cuts of as much as $200 billion during fiscal 2009 and 2010 alone, officials from the National Governors Association and the National Association of State Budget Officers said yesterday.

And while state and local governments have often turned to the municipal bond market in past times of fiscal hardship, current market conditions will likely throw a wrench in a state's ability to use munis as an alternative to pay-go spending, officials said at a press conference when they released their biennial report, the Fiscal Survey of States, which examines budget trends.

The report found the magnitude of problems facing states are creating conditions not seen since the 1980s.

The report said that state spending is expected to decrease by 0.1% in fiscal 2009, the first time a decline has been recorded since 1983, when it dropped by 0.7%.

That's a turnaround from fiscal 2008 when state general fund spending grew by 5.3%, which was still lower than a 31-year average of 6.3%, the report said.

"This is probably going to be a four-year difficult period," Raymond Scheppach, executive director of NGA, said. "Recovery is expected to be relatively slow ... with revenue growth over the four-year period expected to be very small."

While the report said that currently 31 states will be forced to cut their budgets by nearly $30 billion for fiscal 2009, Scheppach said the total amount of cuts that states will need to make over this fiscal year and next could reach between $180 billion to $200 billion.

"It's not a pretty picture and it warns of a worse time to come," said Scott Pattison, executive director of NASBO. Both Pattison and Scheppach said the economic downturn will likely usurp the two previous ones because of the magnitude of problems facing states.

In the economic downturn following the terrorist attacks on Sept. 11, 2001, states were forced 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.

That compares to the $12.1 billion of cuts that 22 states have made so far this fiscal year. Additionally, 31 states have reported budget gaps totaling $29.7 billion for the fiscal year since they made the first round of cuts. Five states are also expected to face gaps, but did not provide a figure because their analysis was not yet complete.

In contrast, 13 states reduced their budgets by $3.6 billion in fiscal 2008, only three states made mid-year cuts in fiscal 2007, and just two made cuts in fiscal 2006.

Eighteen states enacted budgets projecting negative growth for fiscal 2009, compared to fiscal 2008 when six states made negative growth projections.

The reductions stem from a slowdown of tax revenues flowing into state coffers. Pattison said about half of the states expect revenues to come in lower than anticipated in fiscal 2009, which he said is significant because the year is only halfway over and personal income taxes will likely drop off significantly in April when higher unemployment numbers will be realized.

"In fiscal 2009, nearly every state will face significant slowing of revenue growth as the economy falls further into a recession," the report said.

In fiscal 2008, states made across-the-board cuts, imposed lay-offs or hiring freezes, and tapped rainy-day funds to close budget gaps. But the report noted that in fiscal 2009, total year-end balances - the amounts in rainy-day funds - will decline to $48 billion, or 7.4% of state expenditures.

However, excluding oil-rich Texas and Alaska, that figure is will be closer to 4.1%, or $27 billion, and is expected to decline further in fiscal 2009 as states use up more of their reserves. Those figures are down from $40.7 billion, or 6.3%, in 2008, and $53.8 billion, or 8.8%, in fiscal 2007, the report found.

Rating agencies suggest keeping reserves at 5% of expenditures or higher.

The NGA is looking to a federal recovery package as a remedy for ailing states, Scheppach said.

The federal government's role in aiding states should include providing more assistance for Medicaid because the number of unemployed people seeking Medicaid benefits will begin to swell "pretty dramatically" in about six months due to a lag between when unemployment numbers are released and when the unemployed actually seek benefits.

Scheppach said states would need up to $100 billion in federal aid for increased Medicaid costs.

"The downturn in the economy is expected to result in significant increases in Medicaid enrollment as it has in previous recessions," the report stated.

Scheppach also said the economic recovery package being crafted by members of Congress and the incoming administration should include money for infrastructure projects that are ready to go, adding that the NGA is working on a set of recommendations in the next four to five days to help lawmakers and President-elect Barack Obama navigate state needs.

Scheppach said the package should contain money for a combination of short-term stimulus for ready-to-go projects, as well as a longer-term money for investment in bigger projects, but he would not provide a figure for the total amount states would need.

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

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