WASHINGTON - States are facing one of the worst fiscal periods in decades, the National Governors Association and the National Association of State Budget Officers warned in a joint report issued yesterday.
Fiscal conditions have deteriorated for nearly every state during fiscal 2009 and are expected to remain weak in 2010 and possibly even 2011 and 2012 because they typically would lag behind any national economic recovery, the two groups said in their biannual Fiscal Survey of States.
But whether states will react to their declining fiscal conditions by turning to more bond financing varies, said Brian Sigritz, a NASBO staff associate. "Some states are looking at more bond financing and some are not," he said. However, the bond provisions in the American Recovery and Reinvestment Act that was enacted in February has spurred more states to consider bond financing, he added.
The NGA and NASBO said in their report that, for the first time in the 32 year history of the survey, state spending is expected to decline two years in a row because of the sharp declines in revenue resulting from the economic recession that began in December 2007.
In fiscal 2009, which runs from July 1, 2008, through June 30 in 46 states, general fund spending is expected to decrease 2.2%. Governors' recommended budgets for fiscal 2010 show a 2.5% decline in spending. The declines are significant because thus far, 1983 is the only other year actual state general funding spending declined since the survey began in 1979, the two groups said.
For fiscal 2009, collections of sales, personal income, and corporate income taxes are estimated to be 6.1% lower than in fiscal 2008, according to the report, which is based on surveys NASBO conducted from February through May. Sales tax collections are projected to be 3.2% lower while personal income tax collections will be 6.6% lower. Corporate income tax collections are estimated to be 15.2% lower, the two groups found.
Within the state budgets, about 40% of the general fund revenue is from personal income taxes, 33% is from sales taxes, and 8% is from corporate taxes with other sources accounting for the rest, the report said.
Fiscal 2009 revenues are below projections in 38 states, on target in 10 states, and exceeding estimates in only two states, the report found. The lower-than-projected revenue collections have led most states to cut their budgets. States currently estimate that they will face a total of $230 billion in budget gaps between fiscal 2009 and fiscal 2011. They have already taken steps to close $46.2 billion in budget gaps during fiscal 2009, including 42 states that made a total of $31.6 billion in mid-year budget cuts.
The number of states and the size of the budget cuts are the highest in recent history, the report said. In fiscal 2008 only 13 states had to reduce budgets that had already been enacted and in 2007 only three states faced such reductions. But even with those cuts, states are still facing $183.3 billion in budget gaps for fiscal years 2009 through 2011, according to the report.
"The size of the budget cuts and gaps would likely have been much larger without the passage of the ... ARRA," the report said. "Unfortunately, because of the ongoing declines in state revenues, the [ARRA] will not be enough to solve states' current and future budget shortfalls. States will have to continue looking at spending cuts, using rainy-day funds and possible tax and fee increases in order to ensure balanced budgets."
Meanwhile, expenditure pressures continue as the demand for additional funding for Medicaid and other programs increase during tough economic periods and states deal with looming long-term issues such as infrastructure maintenance and repair, the report said.