May 9, 2003

By Nicholas Johnson and Rose Ribeiro

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States have closed, or are closing, about $80 billion in budget shortfalls for the current fiscal year (which ends June 30 in most states) and another $79 billion in shortfalls for FY 2004, according to the National Conference of State Legislatures.  Forced by balanced budget requirements to close these deficits, states have been cutting important programs and services, including education, health care, and public safety.

Now the crisis appears to be worsening.  New data show that in a number of states, including California, Colorado, Connecticut, Idaho, New York, North Carolina, and Pennsylvania, revenues for April fell short of expectations, so these states are raising their deficit forecasts.  Clearly, states are unlikely to pull out of the fiscal crisis by themselves anytime soon.  Without new revenues, states are likely to enact increasingly painful budget cuts.


What Public Services Are Being Cut?

Examples of Cuts in Services

  • Oregon — Some 50 school districts are shortening the school year.
  • Ohio — Some 17,000 children are losing child care subsidies.
  • Kentucky — almost 900 non-violent offenders were released early from prison.

States spend most of their money on education, health care, public safety, and human services.  All of those areas have been subject to sharp reductions in recent months, and more cuts lie ahead.


State Budget Shortfalls May Be Growing

Though significant, the spending cuts states have already enacted are far from sufficient to solve their budget crisis.  As of late April, states still faced about $22 billion in shortfalls for 2003 and another $54 billion for 2004, according to NCSL.  With rainy day funds and other reserves largely drained, and with very limited ability to borrow funds to cover operating costs, states are likely to close these shortfalls through large spending cuts and perhaps tax increases.

Ultimately, the amount of spending cuts may well exceed what anyone has acknowledged to date.  In the last few days, states such as California, Colorado, Connecticut, Idaho, New York, North Carolina, and Pennsylvania have reported lower-than-expected revenues for April.  Because April marks the end of the income tax filing season, states pay close attention to April receipts in developing revenue projections, and often revise forecasts as a result.

The national scope of the revenue problem is confirmed by U.S. Treasury reports, which show federal taxes coming in below last year’s levels and lower than expectations.  Since state income taxes use essentially the same tax base as federal income taxes, the Treasury reports — combined with initial state reports for April — suggest that the state fiscal crisis may be getting worse and that even more painful measures may lie ahead.