After scrambling to sew up $84 billion in budget holes for the new fiscal year, states already face as much as $149 billion in new shortfalls during the next three, according to a report Tuesday from the National Conference of State Legislatures.
Fiscal 2010, which ended June 30 in most states, was a tough year for them. Tax receipts shriveled 4.6% through the first three quarters, according to the Census Bureau, with drastic declines in income and sales taxes.
The states are living in very interesting times with uncertain federal aid, needy municipalities clamoring for state aid, and tax revenues that are just now starting to show signs of recovery after a lengthy decline.
Taxes make up almost half of state revenue, based on Census data from 2008, the last year for which comprehensive data is available.
States raised $1.6 trillion in revenue that year, with taxes generating $782 billion of that sum.
Many states exhausted the easiest spending cuts available to them in response to shrinking tax collections from late 2008 though the first quarter of the current fiscal year, according to the report.
“The least painful cuts had been made and many one-time revenue sources had already been tapped or exhausted,” the NCSL said.
Projected spending outpaced anticipated revenue by staggering amounts in some states.
More than $10.7 billion, or 28%, of New Jersey’s projected spending did not pair with the revenue expected to finance it.
Illinois expected $6.1 billion in spending without matching revenue. Arizona’s budget gap was 27.2%, and North Carolina’s was 25%.
The 45 states that participated in the NCSL’s study trimmed general fund spending 4.6% in fiscal 2010.
Many tried to broaden their tax base by eliminating certain tax exemptions, and some tried to tax products like gum or candy.
The federal stimulus also helped. According to a Moody’s Investors Service report last week, the $135 billion in stimulus money the states received in 2009 was a primary reason only five were downgraded.
However, state financial cushions are eroding.
At the end of fiscal 2010, year-end balances — defined as money available in the general and rainy-day funds — represented 5.7% of annual spending. That compares with 7% at the end of fiscal 2009.
Excluding the nearly $20 billion combined rainy-day funds of Alaska and Texas, which the NCSL believes can skew the overall numbers, the year-end balance was just 1.8% of spending.
Less than a month into fiscal 2011, new shortfalls are emerging.
States already face more than $12 billion in expected new gaps for the current fiscal year, the NCSL found.
The year-end balance excluding Alaska and Texas is expected to further erode, to 1.1% of spending, due to those new shortfalls.
A lackluster recovery in revenue, mounting spending pressures, and the end of federal stimulus aid have forced projections for expenditures north of revenues to the tune of $72.1 billion in fiscal 2012 and $64.3 billion in 2013.
California officials already believe projected spending exceeds projected revenues by nearly $23 billion, or 20%, for the next fiscal year.
Minnesota and New York both face projected gaps of more than 20% of anticipated spending. Hawaii’s expected gap exceeds 30%.
“State lawmakers are going to need extra stamina to push through this next round of budget challenges,” William Pound, executive director of the NCSL, said in a statement. “It will be a long march before state revenues return to their pre-recession levels.”
The overall tone of the report was hesitantly hopeful.
It cited an “apparent bottom of a deep revenue chasm,” and asserted that “states are beginning their arduous uphill climb.”
Numerous state officials report that revenues are starting to tick up or have slowed their rate of decline.
Most states expect tax receipts to improve this year.
“The grueling journey to state revenue recovery has begun in many states,” the report said, “but conditions remain volatile.”
The $12.3 billion in deficits that are already threatening to surface for the current fiscal year are mainly attributable to the dispute over how the federal government absorbs some state Medicaid costs.
The federal government shares Medicaid costs with each state under a formula known as Federal Medical Assistance Percentages.
The federal government raised its share of the FMAP under the stimulus legislation enacted in February last year.
While Congress passed legislation earlier this year to extend the greater contribution to Medicaid, the outcome remains uncertain.
Many states drew up budgets that assumed they would continue to receive extra help from Washington on Medicaid costs.
Should the FMAP revert to previous levels, states would be responsible for coming up with the additional money they expected from the federal government.
Alabama, for example, budgeted for $197 million in extra Medicaid assistance. That shortfall would represent 12% of the state’s $1.6 billion spending plan.
California’s new gap could be $1.5 billion.