Academic journal article The Journal of Government Financial Management

State Budget Crisis: The Perfect Storm

Academic journal article The Journal of Government Financial Management

State Budget Crisis: The Perfect Storm

Article excerpt

"States are facing a perfect storm: deteriorating tax bases, an explosion in health care costs, and a virtual collapse of capital gains and corporate profit tax revenues. The current problem is long run and structural, and will take at least three to five years to remedy. In the short run, states have no alternative but to cut spending or increase taxes. But in the long run, Medicaid and state tax systems need major reform, as states no longer have the financial capacity to support their current commitments."

Raymond Scheppach

National Governors Association

States find themselves in their most precarious financial position in decades, and no immediate relief is in sight. While the recently enacted federal tax package will provide some $20 billion in assistance (see page 8), most states are finding themselves having to cut programs once thought sacred, find new sources of revenues and at least give a second thought to raising taxes.

Magnitude of the Problem

The National Conference of State Legislatures' (NCSL) State Budget Update: April 2003 summarizes the plight facing the 50 states and the District of Columbia. They report that many states have been wrestling with shortfalls for three years. When enacting their 2003 budgets, states had to address shortfalls totaling collectively some $49.1 billion. Despite these actions, in early January of this year they were still looking at a combined 2003 budget gap of some $25.7 billion. By April, the cumulative shortfall had been reduced to $21.5 billion, but more than half of the states were reporting they still had gaps to dose. Thirteen had shortfalls that exceeded 5 percent of their general funds. California's $8.2 billion shortfall was by far the largest in sheer magnitude, followed by New York at $2.5 billion, Texas at $1.79 billion, and Illinois at $1.58 billion. However, the gaps yet to be resolved by both Alaska ($500 million) and Oregon ($1.06 billion) were the largest in terms of their percentage of general fund budgets, running 25 percent and 18.5 percent, respectively.1

As of April, only three states had reported their fiscal year 2003 revenue projections were above budgeted levels. Revenues were on target in 10 states but fell below budget in 37 others. Thirty-four states also reported that spending was running in excess of budgeted levels, compounding problems at a time when they could least afford it.2 Perhaps most telling, year-end balances as a percentage of expenditures are projected to be at their lowest level in years (see Figure 1).

Unfortunately, 2004 looks no less ominous. While many states were still meeting to address their budget difficulties as this article was being written, NCSL reported in April that more than half the states were still addressing 2004 shortfalls of some $53.5 billion.3 State officials have indicated they made their easiest cuts in previous years, and now find themselves facing difficult decisions that will clearly impact both the quality and level of services they can provide.

State Responses

The Fiscal Survey of States reports that during fiscal year 2002, 26 states made across-the-board budget reductions, 26 others tapped "rainy day" funds, 15 states laid off employees, five offered early retirement options and 13 states reorganized programs. Other methods of coping with shortfalls have included delaying expenditures, reducing travel, imposing hiring freezes, enacting targeted reductions and making fund transfers, to name but a few.4

Even once sacred programs like K-12 education, higher education and Medicaid have been hit by cuts. States are well past the point of easy decisions and are looking to make cuts where the dollars are being spent (see Figure 2). Other traditionally favored areas, like debt service, public safety, and aid to towns and cities have similarly been affected. Moreover, these programs will remain under pressure as states struggle to balance fiscal year 2004 budgets. …

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