WASHINGTON — Despite their expectations that the worst could be over for state finances, three groups warned yesterday that budget gaps, revenue shortfalls, and spending constraints are likely to continue this fiscal year and next.
The fiscal year that is currently coming to a close for most states has been the most difficult since the Great Depression, according to a biennial survey released today by the National Association of State Budget Officers and the National Governors Association. The survey said the recession’s ability to chip away at tax revenue from every source will endure throughout fiscal 2011 and 2012. Fiscal 2011 begins July 1 for most states.
“I believe we’re hitting the bottom,” said Raymond C. Sheppach, the NGA’s executive director, adding that he predicts growth will come in two or three years.
The survey found that states are curtailing their general fund outlays significantly and will be forced in the coming fiscal year to “make some hard decisions” about whether to cut such things as education and health care spending, said Scott D. Pattison, executive director of NASBO.
In addition, rainy-day funds in 13 states have been drained to such low levels that NASBO considers them to be nonexistent, Pattison said.
He added that states may be less willing to turn to bond issuance in lieu of healthy revenues, but municipal bond payments will be safe from the turmoil.
“On the debt side, I see absolutely no problem as far as defaults or anything like that, particularly at the state level,” Pattison said.
General fund spending by states fell to an estimated $612.9 billion in fiscal 2010 from $657.9 billion in fiscal 2009, due to states trying to compensate for lower tax revenue and to comply with balanced-budget requirements.
Spending has declined throughout the past two fiscal years, which is unprecedented and is only the second time in the history of the survey that general fund spending has decreased, the report said. Forty states pared their general fund spending from 2009 levels, and governors for 13 states recommended lowering general fund outlays for fiscal 2011.
The cuts to general fund spending are due to “significant declines in sales, personal income, and corporate income tax collections,” which make up 80% of general fund revenues, according to the report. Revenue declines also caused 40 states to make mid-year budget cuts totaling $22 billion.
The recession’s sustained squeeze on tax revenue, paired with increased demand for social services like Medicaid, will have caused a total of $296.6 billion in budget gaps between fiscal 2009 and 2012. However, only about 40% of those shortfalls are left to come in the next two years.
The revenue picture could start to brighten this year, but Pattison said revenues “going into [fiscal] 2011 will still be worse than before the recession.”
Revenue collections from sales, personal income, and corporate income taxes are estimated to be $477 billion in fiscal 2010, an 11.8% decline from fiscal 2008, the report said. However, it said revenue is not expected to fall significantly in fiscal 2011; it will simply hover below pre-recession levels.
Tax and fee increases that states enacted in fiscal 2010 generated $23.9 billion more tax revenue than in fiscal 2009, according to the report.
A report also issued yesterday by the Nelson A. Rockefeller Institute of Government mirrored this analysis and attributed much of the growth in the first quarter of 2010 to California and New York alone. Revenue-driven legislative changes in those states generated $3.2 billion, or 20% more revenue for California and $2.3 billion, or 16%, more for New York.
But Louisiana and Montana reported huge dips in tax revenue — 32.8% and 25%, respectively — during the quarter, partly because oil and gas production taxes were less effective as fuel production and commodity prices were falling.
Additionally, an upswing in revenues that still fails to reach pre-recession levels may not help states weather other events in fiscal 2011, notably the sudden loss of federal aid when the American Recovery and Reinvestment Act expires, Pattison said.
The Rockefeller Institute said its data for the first quarter of this year showed a mild improvement in state tax collections in all areas. States took in $138 billion of tax revenues between January and March, up slightly from $134.8 billion for the same quarter last year.
However, analyst Lucy Dadayan said in the report that revenue collections are expected to be weak in the second quarter of this year, which is nearing its end. The data paralleled that of NGA and NASBO, showing that despite some modest improvement, revenues were still much lower than in 2008, when the recession began to drain state coffers.