THIS STORY IS EMBARGOED UNTIL MIDNIGHT EST 12-7-10
By Stephen Groves
The budget outlook for states in the coming year isn't pretty, and it won't be getting better any time soon.
The National Conference of State Legislatures (NCSL) released a state budget update on Wednesday that detailed the woes of states trying to make ends meet.
“Although a recovering national economy is helping stabilize state revenues in fiscal year (FY) 2011, serious budget challenges await state lawmakers in the New Year,” says the report from NCSL. “This largely stems from fewer federal stimulus funds available for next year’s budgets.”
If budgets were running on the financial fumes of the American Recovery and Reinvestment Act (ARRA) this fiscal year, states won’t be able to get by on those in the FY 2012. States will lose $37.9 billion in federal funds they had in FY 2011.
Borrowing also will catch up with states in coming years, as they will have to repay loans to the federal trust fund for unemployment benefits. States such as Virginia also have committed to repaying the money from state employees’ pension funds.
States have cut back on spending during the lean years, but many are running out of things to cut, budget officials say.
“The low-hanging fruit has been picked. A lot of difficult actions have been taken by states already, but many budget and governors’ offices are telling us that fiscal year 2012 could be even worse,” said Scott Pattison, executive director of the National Association of State Budget Officers.
And, the recession may expose problems that wallowed just beneath the surface of state budgets for years. According to the U.S. Government Accountability Office, expenditures grew faster than own-source revenues in almost all states between 1977 and 2007. In the past 30 years, health care funding has gobbled up a greater percentage of state and local budgets, growing from 12 percent in 1978 to 20 percent in 2008.
However, the NCSL report offers a slight glimmer of hope. States are reporting better revenue in the first few months of FY 2011 than has been seen in years. NCSL's survey of state legislative fiscal offices found that 31 states reported a stable outlook on revenue for the remainder of FY 2011.
But, that glimmer fades in the looming budget gaps of many states.
As Ray Scheppach, executive director of the National Governor’s Association, darkly quipped, “We’ve got 29 new governors coming in. We just hope they don’t quit when they see how bad the budget is.”
Many states are still scrambling to pay the bills, with 15 predicting budget gaps in FY 2011. They range from Connecticut, which has an $86 million budget gap, to Illinois, which has not accounted for $13 billion.
As the NGA's state fiscal legislative office described it, “The fiscal situation is dire.”
It gets worse in 2012 when states must forego the federal recovery dollars, leaving a majority of states with budget gaps.
“Budget officers and governors are still very, very concerned about how do they actually get through the next few years,” Scheppach said.
The way states survive will likely come from more painful cuts, said Jim Johnson, a public policy professor at North Carolina's Duke University. He said states will look at cutting things like Medicaid, public schools, community colleges, public universities and corrections facilities.
States also will likely change their pension systems from “defined benefit plans” to “defined contribution plans,” in which employees pay into their pension system much like a 401(k).
It's possible that governors will ask for extensions in funding as they did for Medicaid — or Federal Medical Assistance Percentages (FMAP) — this past summer.
But “there seems not to be much appetite in Washington to extend all that,” Johnson said.
So for now, states will tighten their belts.
“You have to make big changes now, but they don’t often save you money for 10 to 15 years,” Scheppach said.