State Budgets Getting Worse Before Better

First the good news: state revenues are rising. After three years,state revenues that dried up due to the Great Recession have increased steadilyand helped to fill state treasuries. The flow of revenue has been so solid thatsome states, such as Maryland, have reported surpluses at the end of the lastfiscal year.


But here’s the bad news: despite the growth in revenue,states should expect to confront another round of massive budget deficits, someof which will be even worse than what the states have encountered thus far. Statesalready face budget shortfalls in excess of $82 billion, according to theNational Conference of State Legislatures. But that figure will likely behigher as state budget officials review their fiscal figures over the nextseveral months.


Revenue collections, according to Stateline, have fallen somuch in this recession that it will take years for the collections to return toprecession levels. But another problem is that the cost of government isincreasing, especially in healthcare, education, and public safety budgets.Given the nature of the political process, governors and state lawmakers willtry to balance budgets and forestall cuts by resorting to tax increases,one-time fixes, borrowing, and accounting gimmicks. To name just one example,California’s Governor Jerry Brown is already talking about putting on theballot a measure that would extend several unpopular tax hikes.


But it is also possible that the dire circumstances statesfind themselves in will finally force state officials, regardless of theirparty affiliations, to have the difficult conversation among themselves andwith constituents about what services government can and should provide. Forexamples, Arizona’s Republican governor and New York’s Democrat governor areexamining ways to reduce the size of their Medicaid programs by limitingeligibility, an idea once thought to be impossible.


The road back to the pre-recession days will be long andhard. Predictions for economic recovery are grim, especially as the FederalReserve projects that unemployment will be at 8% through the end of 2012.Further, the rate of growth will have to be consistently higher than historiclevels. By one estimate, Oregon’s revenues will not return to pre-recessionlevels even after a decade of growth.


What all this means for states is that Great Recession willhave a greater impact than originally thought and state officials must factorthis into their policies. No longer can states spend without restraint or underthe assumption that revenues will quickly return to fix fiscal problems. Thestates must adjust to a new normal by having an honest conversation withtaxpayers about the tough decisions ahead.