Update on State Budgets

We recently updated our analysis of state budget shortfalls, showing that states still have a long road ahead.  They face:

• For fiscal 2012, the most difficult budget year on record. Some 44 states and the District of Columbia are projecting budget shortfalls totaling $125 billion. The chart below shows how state revenue losses exceed previous recessions:

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• Declining federal assistance. Federal aid to states under the February 2009 American Recovery and Reinvestment Act and, to a smaller degree, the August 2010 jobs bill has lessened state cuts in services and tax increases.  But the aid will be mostly gone by next year.
• A long road to recovery. Despite some modest signs of improvement, 22 states are projecting shortfalls totaling $70 billion for fiscal year 2013 (the year that begins 17 months from now).  Once all states have prepared estimates, this total will likely grow.  So, significant state shortfalls are expected to persist into the future.
• Difficult choices. Low levels of revenue due to the recession mean that states have to choose between raising taxes and cutting spending in order to balance their budgets.  Spending cuts are problematic during an economic downturn because they reduce overall demand and can make things worse (we’ve tracked the cuts that states have already made here).   In his blog post, my colleague Jon Shure explained why a balanced approach that doesn’t rely solely on spending cuts is the best move for states.

While the huge deficits of recent years have caused severe problems for states and localities that are struggling to maintain needed services, this is a cyclical problem that ultimately will ease as the economy recovers.

As we explained in a major report last week, these cyclical deficits are distinct from the longer-term issues related to bond indebtedness, pension obligations, and retiree health insurance.  States can address these latter issues — the size of which often has been exaggerated in recent months — over the next several decades.  It is not appropriate to add these longer-term costs to projected operating deficits and declare that states are in a crisis that’s too deep for them to handle.