Grim Numbers for State Budgets Suggest Decade Before Recovery

WASHINGTON (CN) - Grim declines in state revenues prompted predictions by two state government groups that states will not fully recover from the recession until late next decade. "These are the worst numbers we've ever seen in the decades of putting together this report," said Scott Pattison, executive director of one group.

"States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending in ways that impact every part of state government," Pattison said Thursday.

In the face of a cumulative $250 billion budget shortfall over the next two fiscal years, states reduced spending by $31.6 billion, almost 5 percent, in 2009, and are expected to slash it by 4 percent in fiscal 2010.

The cuts would be the first time state spending has declined two years in a row, according to a preliminary biannual report by the National Governor's Association and the National Association of State Budget Officers.

Even with these reductions, state spending continues to outstrip revenue, which fell by 7.5 percent in fiscal 2009. Revenues will likely remain depressed into 2012, despite state efforts to tweak taxes and fees that have already brought in an additional $23 billion in revenue on the whole.

While state-by-state data has not yet been released, Pattison said in an interview that states that suffered from the housing sector bust first are among the ones hurting the most because they've been suffering the longest; states heavily involved in the financial sector, such as New York and Connecticut, are also suffering.

States that were more conservative in their budget forecasts, such as Arkansas, have been less affected. "Shortfalls are a function of forecast," Pattison said, because a shortfall is the difference between the expected budget and the actual budget.

Growing oil and agriculture prices have reduced the strain on some states, such as North Dakota and Texas. North Dakota is the only state not suffering from fiscal difficulty, which Pattison attributed to newly developed petroleum and natural gas deposits there.

Every state but Vermont has budget balancing laws, so they will likely have to raise taxes or reduce services even more to close the remaining budget gap.

The $135 billion in flexible emergency funding provided to the states through the Recovery Act has eased some of the strain.

While the national economy experienced its first growth in a year during the third quarter of fiscal 2009, state revenue increases historically lag any national economic recovery.

"States will continue to struggle over the next decade because of the combination of the length and depth of this economic downturn, the projected slow recovery and the overhang of unmet needs," NGA Executive Director Raymond Scheppach said in a press release.

Unmet needs include replenishing retiree pension and health care trust funds, repairing neglected infrastructure, and rebuilding rainy day funds.

"The bottom line, Scheppach said, "is that states will not fully recover from this recession until late in the next decade."

The complete report is scheduled for release early next month. The preliminary report was released because people were clamoring for it, Pattison said.

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