State of the State: A View from the CAFRs

By Kinnersley, Randy; Shoulders, Craig D. | The Journal of Government Financial Management, Summer 2011 | Go to article overview
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State of the State: A View from the CAFRs


Kinnersley, Randy, Shoulders, Craig D., The Journal of Government Financial Management


Everything was going so well.

Then came the:

* Mortgage crisis

* Financial crisis and bailouts

* Layoffs and bankruptcies

* High unemployment

* Stimulus bill

* Shrinking home values, retirement portfolios and overall wealth

* Falling tax revenues

* Global economic crisis

* Rising federal deficits and debt levels

All these factors hit state economies. Families and businesses felt the financial squeeze months before the "Great Recession" officially began in December 2007. State governments began to feel the dual effects of declining state revenues and the increased service needs of businesses, individuals and families. The strain deepened in 2008 and 2009. Since the recession officially ended in June 2009, the recovery has been slowparticularly in terms of employment, which remains about 8 million workers below pre-recession levels.

Tax revenues fell by more than $33 billion in the governmental funds of the 12 largest states because of declining incomes, declining property values, declining spending by consumers and other related reasons. These decreases occurred in spite of increases in tax rates in numerous states, such as the top income tax rates in New York, New Jersey (for 2009 only) and Wisconsin; income and sales tax rates in North Carolina; and cigarette taxes in Florida. Others, such as Kansas and Illinois, have enacted income tax rate increases in 2010 and 2011. Citizens needed more assistance. States absorbed major increases in expenditures for Medicaid, health and human services, social services, and individual and family services.

Federal revenues for governmental funds reported in the most recent financial statements of the 12 largest states exceeded 2007 levels by more than $110 billion. It is not clear that the federal government, as it grapples with the need to reduce its deficits, will continue to provide this increased assistance that helped states deal with the recession. States like North Carolina, whose tax increases were temporary, must potentially contend with revenue reductions from current levels when, and if, these tax increases expire.

Therefore, though the recession is over, states may not have felt its full impact. Many face continued low employment levels and increased public assistance needs even as revenues from the federal government appear apt to shrink and the tax revenues of some remain below 2007 levels.

How badly has the Great Recession affected state finances? How well positioned are the states to cope with the continuing fiscal stress?

The Information Source-States' Own CAFRs

States' comprehensive annual financial reports (CAFRs) are one source of information about how states weathered the recession and how prepared they are for the challenges ahead. Data gathered from states' 2007 CAFRs and 2010 CAFRs (2009 for three states) are the basis for the analysis.

We analyzed the states in three groups:

* Large states (The lowest population of these 12 states is 8,001,024, and together they comprise 59.5 percent of the U.S. population, according to the 2010 census.)

* Mid-size states (The highest population of these 23 states is 6,742,540 and the lowest is 2,700,551together equaling 34.6 percent of the U.S. population.)

* Small states (The highest population of these 15 states is 2,059,179-and their total is 5.7 percent of the U.S. population.)2

The groups are separated at the largest natural population breaks in 2010, subject to having at least 10 states in each group.

The Measures Used

Three primary measures are evaluated using selected fund-based and government-wide financial statement information. Two are traditional, well-accepted fund-based measures. The other measure is based on information in the government-wide financial statements. Two prior studies-one on states-used slight variations of these measures.

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