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Recession Lies Behind State Budget Problems

When it comes to state finances, the big story is still the old story:  the recession, and the way it has continued to hurt states’ ability to keep up with rising needs.

New Census Bureau data give us critical perspective on what happened to state finances in 2008-09  — the first full fiscal year after the recession began.  Declines in earnings and purchases by households and businesses pushed tax revenues down by $67 billion, a collapse of unprecedented magnitude.  Rising joblessness and lost health insurance coverage increased the number of people eligible for Medicaid and other services.

As the Washington Post says in a story today about the Census data: “The economy has improved since the depths of the recession as the stock market has rebounded and states’ tax revenue has begun to tick upward.  Still, the recession’s lingering effects — particularly a national unemployment rate that is hovering at close to 10 percent — have left the vast majority of states with large budget deficits and increasing service demands.”

Bad as it was, it’s still important, though, not to exaggerate what happened.  Both the Post and the New York Times note the presence of a line in the Census data that on casual glance appears to suggest a stunning 30 percent drop in state revenues.  In fact, most of that decline is attributable to paper losses suffered by state employee trust funds when the stock market went south in 2008.

In reality — to quote the Times — the pension fund decline had “little immediate impact on state budgets.”  That is because states will have several decades to make it up, and the Census data don’t reflect the fact that pension funds generally earned most of the losses back when the stock market rebounded in late 2009 and 2010.  A Center analysis scheduled for release next week will explain further the reality of state pension fund challenges and their current and future implications for state budgets.

By contrast, the decline in tax revenue and the increased demand on state services caused an immediate problem for state budgets that hasn’t gone away.  Our analysis of a different set of Census tax data — this one collected on a quarterly basis — shows that, adjusted for inflation, state tax revenues are still 12 percent below pre-recession levels as of the third quarter of 2010.

There was a bright side for states reflected in the 2009 data.  While the recession was costing states tax revenue — threatening education, health care, and other services — the federal government was helping states recover some of that lost revenue.  Federal assistance to states for education, health care, and other areas rose $52 billion in fiscal year 2009, the Census Bureau said.  This is due in part to the beneficial impacts of the American Recovery and Reinvestment Act — the “stimulus” law enacted in 2009.  Without it, states’ budget problems would have been even worse; more people would have lost their jobs and more families would have gone without help they needed.

Unfortunately, that aid is scheduled to expire at the end of the current fiscal year.  As a result, states face budget gaps in 2012 that will make 2009 look almost rosy by comparison.