National Council of Nonprofit Associations

Reprinted with permission from the Center for Budget and Policy Priorities (www.cbpp.org) - updated January 14, 2009

STATES IN TROUBLE DUE TO ECONOMIC DOWNTURN

The weak economy is generating great fiscal distress among states.  Combined budget gaps for the remainder of the current fiscal year and the next two years are estimated to total more than $350 billion.

Because states cannot run deficits, they must close their shortfalls by cutting spending or raising taxes.  That causes two further problems.  First, their spending cuts and tax increases take money out of the economy, making the downturn even worse.  Second, as states have to cut back, they cannot respond to the rising need for health care and other services that occurs when workers lose jobs or are otherwise hit by the economic downturn.

Forty-five states faced or are facing budget shortfalls.

• In 41 states and Washington, D.C., 2009 budgets have fallen out of balance since their enactment, producing mid-year deficits that total more than $43 billion (or 9 percent of budgets).   These mid-year shortfalls are in addition to $48 billion in budget gaps that 29 states closed when enacting their fiscal 2009 budgets, which began on July 1 in most states.  Total fiscal 2009 budget gaps equal 14 percent of these states’ general fund (operating) budgets.

• Thirty-nine states already project shortfalls totaling more than $80 billion for fiscal 2010 (which in most states begins July 1, 2009).  As the full extent of 2010 budget gaps become known, shortfalls are likely to equal $145 billion (based on expected economic deterioration and the relationship of state revenues to the economy).

• Fiscal distress is highly likely to continue into state fiscal year 2011, with deficits exceeding those projected for 2010.

• These estimates assume the absence of an effective economic recovery package and/or fiscal relief.  Federal action could significantly reduce the size of these shortfalls.

The state revenue situation is rapidly worsening.

• To keep pace with the cost of services, state revenues must grow.  But overall revenues last year were essentially flat and are weakening dramatically this year.

• Sales taxes are the hardest hit so far, reflecting a fall in both personal consumption and business purchases.  But income taxes and other taxes are also falling.  Recent stock market declines and continued job losses will depress revenues further.

States face other problems from the weakening economy.

• Employers are reducing jobs and cutting back on employer-provided health coverage.  As a result, more families are turning to programs like Medicaid, which provides health coverage to low- and moderate-income families and is jointly funded by Washington and the states.

• State spending levels were relatively low even before this crisis.  Aggregate state spending fell sharply relative to the economy during the 2001 recession, and it remained below the 2001 level as a share of the economy when states adopted their 2008 budgets.  The funding cuts that states will likely make in the coming months will reduce overall spending further below 2001 levels.

• States have already substantially used budget reserves to address funding gaps, but these reserves are limited.  States ended fiscal 2006 and 2007 with $69 billion in reserves each year, equal to about 11 percent of their budgets.  Those are the largest reserves states have ever accumulated.  But now states have used a significant portion of those reserves, and the remaining amount will not be enough to solve state budget problems.

33 states have cut a range of services, including those aimed at some of their most vulnerable residents.  Also, some states have raised taxes.

• At least 22 states have enacted or implemented cuts that will affect low-income families’ eligibility for health insurance or reduce their access to health care; at least 21 states are cutting medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities; at least 21 states are cutting K-12 and early education; and at least 28 states have implemented cuts to public colleges and universities.  Also, at least 34 states have proposed or implemented cuts to their state workforce.

• Also, several states already have enacted tax increases, closed loopholes, restricted tax credits, increased tobacco taxes, raised tuitions, or implemented other revenue-raising measures.  For example, Maryland, Michigan, and New York each raised revenues by more than $1 billion for fiscal 2009, while also cutting spending.