New Report: States on the Brink of Fiscal Collapse
Policy + Politics

New Report: States on the Brink of Fiscal Collapse

An alarming new report issued this morning from the National Conference on State Legislatures (NCSL) suggests serious financial struggles for the 50 states as they work to close budget gaps for the remainder of FY 2011 and look ahead to FY 2012 and FY 2013.

Collectively, the states face a budget hole of $83.9 billion for FY 2011 and at least 15 states have reported new deficit increases of $26.7 billion. This is the third or fourth consecutive shortfall for some states, and FY 2012 doesn’t look much better with projected shortfalls totaling $82.1 billion. 

“This is the worst fiscal crisis the states have faced since the Great Depression,” said Arturo Perez, a fiscal analyst with NCSL.

These colossal budget gaps are due to a combination of factors: weak revenue performance, lower than anticipated federal funding, spending overruns, high unemployment and soaring Medicaid rolls. A portion of Colorado’s $248.7 million deficit for FY 2011 is the result of a revenue shortfall of $57.5 million, and a shortage of Federal Medical Assistance Percentages or FMAP funds amounting to $67.2 million.

The Struggling States
Many states have used the two tools in their arsenal: They’ve made sharp cuts in spending and raised taxes over the past two years. “All of the low-hanging fruit has already been picked,” Perez said. “What we will see is an increase in the number of more difficult options that state lawmakers have to consider.”

Some states have resorted to draconian measures to cut costs. Arizona recently cut funding for organ transplants for about 100 low-income families. Yesterday, Texas state officials ordered a new round of spending cuts on top of the $1.2 billion they had already cut. If the $500 million in cuts are approved, 9,800 state jobs and entire agencies would be eliminated. 

But there’s a catch 22:  Eliminating jobs means less tax revenue and spending, more state payouts for essential services. Perez says that with the high unemployment rate of 9.8 percent, greater demands will be made of such safety-net programs as Medicaid, Families and Children Health Insurance Program (FCHIP) and Temporary Assistance for Needy Families (TANF), straining states even further.

Fed Funds Fade in 2012
As states head into FY 2012, they’ll have $37.9 billion less in federal stimulus funding than the $89 billion doled out in FY 2011. In FY 2010, temporary federal aid to states totaled over $107 billion, according to a recent report by the National Association of State Budget Officers (NASBO).

“The fact that [this funding] will not be available to them in 2012 and will not be replaced by quick growth and revenue puts them in a shortfall situation relative to what they’ve been experiencing,” Perez said. He estimates expiring stimulus funds accounted for five percent of state budgets last year.

Bright Spots Nonetheless
There were a few bright spots in the NCSL report. The data, based on a survey of state budget officials in the fall of 2010, says tax revenue performance has improved and is stabilizing in some areas. Sixteen states reported that personal income tax collection, which accounts for nearly 35 percent of state-owned source revenues, exceeded the most recent estimates.

The NASBO also found that state spending is expected to rise 5.3 percent in fiscal 2011 as 35 states enacted budgets with spending levels above those of fiscal 2010. However, declines in state spending for fiscal 2010 and fiscal 2009 remain nearly $42 billion, or 6.2 percent below pre-recession 2008 levels. The fiscal 2010 general fund spending decline of 7.3 percent is the largest decline in state spending in the history of the report.