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WHEN CARS FLY?: Report Projects State Revenues to Recover in 2014 or 2015, Recessionary Effects on State Budgets to Last Until Late in Next Decade

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"Previous downturns have proven that the worst budget years for a state are the two years after the national recession is declared over."

In Back to the Future Part II, Marty McFly (Michael J. Fox) and “Doc” Emmett Brown (Christopher Lloyd) use their time-traveling DeLorean to travel to 2015 in an effort to save McFly’s kids from ruin. In the movie, 2015 is filled with flying cars and even a Chicago Cubs World Series victory. The movie was obviously fictional, but according to a preliminary review of The Fiscal Survey of States, released earlier this month, some state budget officers probably wish they could travel to 2015 because that is also the year that state revenues are projected to recover from the economic recession.

Although the national economy is showing signs of recovery, the picture is not nearly as rosy for states, according to the preliminary findings of the report, which is published jointly by the National Governors Association and the National Association of State Budget Officers (NASBO). In fact, even after accounting for spending cuts and tax increases, states are expecting new budget shortfalls totaling $14.5 billion for Fiscal Year (FY) 2010 and $21.9 billion for FY 2011-amounts that are expected to increase dramatically over the next several months.

States have already closed budget gaps of $72.7 billion in FY 2009 and $113.1 billion in FY 2010. However, with revenues down 11.7 percent and 16.6 percent in the first two quarters of 2009, respectively, and Medicaid spending up nearly 8 percent in FY 2009, states may not fully recover from the recession until late in the next decade, the report finds.

The report acknowledges the role of the American Recovery and Reinvestment Act (ARRA), which provided about $246 billion to states and allowed them to offset planned budget cuts and tax increases. “If Congress had not made these funds available, state budget cuts and tax increases would have been much more draconian and devastating to state governments, their employees, and citizens,” the report reads. However, it adds that ARRA funds will expire in December 2010, which forces states to plan for the “serious cliff in revenues” that they will face at that time.

“Previous downturns have proven that the worst budget years for a state are the two years after the national recession is declared over,” the report reads. “States’ recoveries from the current recession, however, may be prolonged with most economists projecting a slow and potentially jobless national recovery. … The combination of falling revenues, which accompany high unemployment, and an explosion in Medicaid enrollment, which occurs very late in an economic downturn, explain why a recession’s greatest impact on state budgets occurs one to two years after the downturn is over.”

The report cites research projecting that state revenues will likely recover in 2014 or 2015. However, it adds that states will continue to struggle even when recovery begins because they will need to replenish retiree pension and health care trust funds, while paying for maintenance, technology, and infrastructure investments that were deferred during the crisis. Additionally, states will need to replenish contingency or rainy day funds.

“These are the worst numbers we’ve ever seen in the decades of putting together this report,” said Scott D. Pattison, executive director of NASBO. “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.”

Read the report at http://tinyurl.com/ylmnhvp.

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