Washington, DC, USA. A new survey says states could be facing two years of budget troubles as revenues continue to fall and spending pressures mount.

 

The budget year that begins July 1 will be one of the bleakest for state governments in the last three decades, according to a report [C1] released on 19 June 19 2008.

 

In some ways, the fiscal survey of states by the National Governors Association (NGA) [N1] and National Association of State Budget Officers (NASBO) [N2] was not surprising. State officials have been saying for months that the drop in revenue caused mostly by the national housing slump would make fiscal 2009 a tough year.

 

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The Fiscal Survey of States. National Governors Association (NGA) and National Association of State Budget Officers (NASBO). June 2008.  [ Download PDF ]

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But the survey confirmed the depth of the weakening in state finances. General fund spending, which finances the day-to-day cost of operating government, is projected to rise 1 percent in fiscal 2009, compared to 6.7 percent in an average year. This is the third-lowest spending increase in the last 31 years, the associations said.

 

Moreover, 18 states in fiscal 2009, which begins July 1 in all but four states, are predicting negative budget growth, meaning a state spends less in the coming fiscal year than they have spent in the current year. That compares to four states in 2008.

Though state officials began feeling the impact from the national economic downturn in 2008, they are more worried about the next two years. Often it takes states a few years to recover from an economic slowdown because of the lag time in collecting taxes and fees.

 

The report noted that the peak years of the 2001 recession were in fiscal 2002 and 2003, when 37 states slashed spending each of those years even though the national economy had started to recover.

 

“Fiscal 2009 could prove to be more troublesome than fiscal 2008,” said the report, which was scheduled for release at a news conference in Washington. The governors and budget officers associations analyze state spending patterns twice a year. In April, the National Conference of State Legislatures (NCSL) released a similarly grim survey showing 23 states facing budget shortfalls in 2009.

 

Unlike the federal government, states can’t carry deficits from year to year, so state lawmakers must cut spending or raise taxes. Just this week, New Hampshire Gov. John Lynch (D) cut $30 million from the 2009 budget and said he would continue a hiring and travel freeze instituted in February to balance this year’s budget.

 

Connecticut Gov. M. Jodi Rell (R) ordered a spending freeze to save additional money for the current budget year. Both states are confronting deficits in the coming year.

 

States often dip into reserves to cover shortfalls, but the report said those year-end balances are declining along with revenue. States set aside 11.5 percent of expenditures in fiscal 2006, but the figure is projected to fall to 7.5 percent in 2009, the report said. Budget officials generally try to keep at least 5 percent of total expenditures on hand, so most states still have a cushion.

 

At the same time states are trimming budgets, the report stressed that they are under pressure to increase spending, especially on programs such as Medicaid, which provides taxpayer-funded health coverage to 59 million poor Americans. Other states are trying to catch up on needs they have long neglected, including employee pension funds and infrastructure.

 

“Unfortunately when revenue growth declines as a result of a weakened economy, spending pressures for social programs and health care increase,” the report said.

 

Spending on Medicaid, which is the largest part of total state spending, is estimated to go up by 4.4 percent in the governors’ recommended budgets for 2009, the report said. Despite the deteriorating picture of state finances, nearly half of the states proposed to increase coverage to the uninsured in their 2009 budgets.

 

For many states, the report said, revenues began to weaken in fiscal 2008. Revenues from sales, personal income, corporate income and other taxes and fees are below expectations in 20 states in 2009, compared to a year ago when eight states said their collections were less than they had expected. Sales and corporate taxes have taken the largest hit, the report said.

 

Not all states are having trouble. Some oil- and gas-producing states, for example, are benefiting from high energy prices. Still, the report said, most states are monitoring the national economy.

 

 

[N1] The National Governors Association (NGA) was founded in 1908 as the collective voice of the nation's governors. NGA members are the governors of the 50 states, three territories and two commonwealths. NGA provides governors and their senior staff members with services that range from representing states on Capitol Hill and before the Administration on key federal issues to developing and implementing innovative solutions to public policy challenges through the NGA Center for Best Practices.

[N2] The National Association of State Budget Officers (NASBO) has been the professional membership organization for state finance officers for more than sixty years. NASBO is the instrument through which the states collectively advance state budget practices. As the chief financial advisors to our nation's governors, NASBO members are active participants in the public policy discussions at the state level. The major functions of the organization consist of research, policy development, education, training, and technical assistance. These are achieved primarily through NASBO's publications, membership meetings, and training sessions.

 

[C1] The Fiscal Survey of States. National Governors Association (NGA) and National Association of State Budget Officers (NASBO). June 2008.  [ Download PDF ]

Preface

The Fiscal Survey of States is published twice annually by the National Association of State Budget Officers (NASBO) and the National Governors Association (NGA). The series was started in 1979. The survey presents aggregate and individual data on the states’ general fund receipts, expenditures and balances. Although not the totality of state spending, these general funds are used to finance most broad-based state services and are the most important elements in determining the fiscal health of the states. A separate survey that includes total state spending also is conducted annually. The field survey on which this report is based was conducted by NASBO from January through May 2008. The surveys were completed by Governors’ state budget officers in the 50 states.

Executive Summary

Fiscal 2008 marked a turning point for state finances with a significant increase in states seeing fiscal difficulties, in stark contrast to the preceding several years. As the economy has weakened, so has the state revenue and spending picture. The decline of the housing sector along with a weak manufacturing sector have combined to cause significant declines in revenue for a number of states.

The budget difficulties, however, are not universal with many states currently escaping budget shortfalls. Some states have been insulated from the budget difficulties so far due to high energy and agricultural commodity prices as well as less exposure to declines in the housing sector. Even so, most states are concerned about a continued weakening of the national economy and the impact on their individual state fiscal situations. While state fiscal situations vary now, fiscal 2009 could prove to be more troublesome than fiscal 2008.

The economic downturn is reflected in the expectation of only a 1.0 percent general fund spending increase in governors’ recommended budgets for fiscal 2009. This would be the third lowest spending increase in the past thirty-one years and is less than one-sixth of the historical average of 6.7 percent. This is evidence of a significant weakening in state finances although there is still growth in expenditures overall.

The weakening of state fiscal conditions is also reflected in the fiscal 2008 estimated expenditure growth rate of 5.1 percent, a significant drop from the 9.3 percent increase in fiscal 2007 and below the historical average of 6.7 percent. In addition, over a quarter of the states were forced to reduce their enacted budgets for fiscal 2008.

Expenditure pressures continue as demand for increased funding of programs such as Medicaid persist and states deal with looming long-term issues such as funding pensions, demographic shifts, and maintenance and repair of infrastructure. Unfortunately, when revenue growth declines as a result of a weakened economy, spending pressures for social programs and health care increase.

This edition of The Fiscal Survey of States reflects actual fiscal 2007, estimated fiscal 2008, and recommended fiscal 2009 figures. The data were collected during spring 2008.

 

 

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