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THE FISCAL SURVEY OF STATES: Despite Small Increases in State Revenues, Most States Still Facing Significant Budget Gaps, Report Finds

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“Spending and revenue is unlikely to return to prerecession until 2013 or 2014. Since the recession began, states have had significant revenue declines and in order to balance their budgets, have made significant cuts and in some cases enacted tax and fee increases. The end of Recovery Act funding in 2012, along with the growing pension liability and the rise of Medicaid enrollment could further exacerbate the already tight fiscal conditions. Finally, the potential impact of healthcare reform in 2014 is a real unknown at this time.”

After going through two of the most challenging years since the Great Depression, state budgets should see a slight improvement in Fiscal Year (FY) 2011 as revenues are expected to grow slightly, according to a new report from the National Governors Association (NGA) and National Association of State Budget Officers (NASBO). However, the report, The Fiscal Survey of States, warns that most states will still face significant budget gaps. Further complicating matters, the federal money provided to plug state budget gaps through the American Recovery and Reinvestment Act is unlikely to continue. According to the report, the wind down of these flexible funds in FY 2012 will result in a cliff of more than $65 billion.

“Even with a slight improvement over FY 2010, FY 2011 is expected to be another very difficult fiscal year for states,” said NGA Executive Director Raymond C. Scheppach. “Spending and revenue is unlikely to return to prerecession until 2013 or 2014. Since the recession began, states have had significant revenue declines and in order to balance their budgets, have made significant cuts and in some cases enacted tax and fee increases. The end of Recovery Act funding in 2012, along with the growing pension liability and the rise of Medicaid enrollment could further exacerbate the already tight fiscal conditions. Finally, the potential impact of healthcare reform in 2014 is a real unknown at this time.”

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According to the report, FY 2010 general fund expenditures were $612.6 billion, a 7.3 percent decrease compared to FY 2009. FY 2011 state enacted budgets call for $645.1 billion in general fund spending, a 5.3 percent increase, but still $42.2 billion below the level enacted in FY 2008, as shown in the chart to the right.2

The reduction in general fund spending compared to FY 2008 is the result of significant declines in sales, personal income, and corporate tax income collections, which make up approximately 89 percent of general fund revenue, the report finds. It notes that while revenues are projected to increase by 4.4 percent in FY 2011, they are still expected to be $43.7 billion, or 6.5 percent below FY 2008.

Currently, eleven states are reporting nearly $10 billion in budget gaps that must be closed by the end of FY 2011. Looking further into the future, the report finds that FY 2012 and FY 2013 will also represent significant challenges for states are revenues will continue to remain below their 2008 levels. In fact, twenty-three states are already reporting $40.5 billion in budget gaps for FY 2012 and seventeen states are reporting $40.9 billion in budget gaps for FY 2013, the report notes. Those numbers could grow even larger as not all states have completed budget forecasts.

To help close budget gaps, thirty-nine states made $18.3 billion in mid-year budget cuts to their FY 2010 budgets while fourteen states made $4 billion in cuts to their FY 2011 enacted budgets. Of the thirty-nine states that made midyear cuts in FY 2010, thirty-five reduced K–12 education and thirty-two cut higher education. For FY 2011, thirteen of fourteen states reduced K–12 education while ten states have cut higher education spending.

The report notes that the economic recession led to accelerations in Medicaid spending and enrollment growth. In fact, for FY 2010, Medicaid is estimated to account for 21.8 percent of total spending—the single largest portion of total state spending. Elementary and secondary education, at 20.8 percent, is second, followed by higher education (10.1 percent), transportation (8.1 percent), corrections (3.1 percent), public assistance (1.7 percent), and all other expenditures (34.4 percent).

The complete report is available at here.

2 The report notes that general funds do not represent the totality of state spending, but are used to finance most broad-based state services and are the most important elements in determining the fiscal health of the states.

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