WASHINGTON — State finances are the worst they have been in decades and are expected to stay bleak for up to three more years, but states are not likely to change the amount of debt they sell unless they need to assist local issuers, Scott Pattison of the National Association of State Budget Officers, said yesterday.
Pattison made his remarks as the National Governors Association and NASBO issued a report yesterday that predicted that states’ rocky financial landscape could continue through 2012. The report also predicted tax and fee increases recommended in some governors’ fiscal 2010 budgets will generate an additional $23.9 billion to plug budget holes, substantially more than the $726 million of tax and fee increases that were recommended in fiscal 2009.
“These are some of the worst numbers that we have seen, ever,” said Pattison, executive director of NASBO, which has published the survey jointly with NGA for more than 30 years.
Pattison called the results “fairly stark,” pointing to an estimated 6.1% drop in state revenue for fiscal 2009. The drop includes revenue declines of 3.2% for sales tax, 6.6% for personal income tax, and 15.2% for corporate income tax.
“Those numbers may understate the decline in revenues” because the survey was conducted prior to the end of the fiscal year, he said, adding that states relying strongly on the wealthiest individuals for their tax revenue base will be hit harder in the next few years.
The downward trend in revenues has forced states to cut spending and take other actions. To reduce or eliminate budget gaps during this fiscal year, Kansas restructured debt, Utah issued road and building bonds, and Hawaii converted capital improvement project funding from general fund to general obligation bond funds.
Next year’s proposed budgets would plug gaps, including more debt restructuring in Kansas, state appropriation bonds in Minnesota, and a second year of federal stimulus money.
However, Pattison said, overall debt financing will probably remain steady. The “overwhelming majority of states” will neither shy away from issuing bonds nor turn to bonds more often as a result of their revenue drops, he said. States are very low-risk investments compared to other entities, he said, “Even California is low risk ... I think investors realize that,” Pattison said.
States could actually sell more debt in order to aid local governments. “I could see them stepping in” to issue bonds to help localities, he said.
But states are confronting some of their worst fiscal conditions in decades. More than half of states reported negative budget growth in fiscal 2009, and almost three-quarters of their fiscal 2010 budgets project negative growth.
Spending from general funds declined — 2.2% in this fiscal year — for the first time since 1983. And governors have recommended a 2.5% drop in general fund spending next year. If spending does decrease next year, it would be the first time that state spending has dropped for two years in a row, the report said.
Growing unemployment and reliance on public services such as Medicaid will add to the strain, and states will have to find more than $183.3 billion to fix budget gaps between this fiscal year and fiscal 2011, the report said.
Combined with a total of $46.2 billion of budget gaps filled last year, states are facing about $200 billion of budget gaps over a three-year period.
Stimulus funding from the federal government has cushioned the fall somewhat, said NGA executive directorRaymond C. Scheppach. Of the total $787 billion in the stimulus package, about $135 billion that went to the states for schools and Medicaid helped them keep their own budgets afloat.
“Money came in the two areas that governors usually try to protect from budget cuts — education and health care,” Scheppach said. “It would have been worse if we didn’t have a recovery package, but the economy continues to deteriorate despite the recovery package.”
Thirty-six states had to close budget gaps already this fiscal year, and he expects 37 states to have budget gaps in fiscal 2010, he said. Twenty-four states reported that they expect budget gaps to extend into fiscal 2011. “I would expect that to grow,” Pattison said.
