State Budgets Looking Up, But from a Deep Revenue Hole

State revenues are stabilizing, and many states expect some revenue growth in fiscal year 2011 (which started July 1 in most states) after the record decline of recent years, according to recent Census data.  In addition, as states tally up spending and revenues for fiscal year 2010, some are finding that they ended the year in the black.  Yet as I noted last week, total state shortfalls for 2012 will be about as big as this year’s.  Why do states continue to face huge shortfalls if fiscal conditions are looking up?

The reason is simple.  State revenues may have stopped shrinking, but they remain far below the levels needed to maintain current public services, after adjusting for inflation and changes in the number of people using particular services (e.g., the number of children attending public schools).

So, for example, 39 states estimate that their total revenues for 2012 will fall $112 billion short of the amount needed to maintain current services.  We estimate that, once all states have prepared estimates, the total shortfall will reach about $140 billion.

Since the start of the recession, states have faced about $425 billion in shortfalls for fiscal years 2009-2011.  In each of these years, states closed their shortfalls and enacted balanced budgets, as they are required to do.  But to get to that point, they made tough decisions about cutting services, raising revenues, and other budget-balancing measures.

Until employment returns to pre-recession levels, state revenues won’t be healthy enough to avert the need for more spending cuts and tax increases each year — even if some states ended the previous year with small surpluses and even if revenues are projected to grow a little from their very low levels.

You can find more information, including state-by-state figures, in our recent report.