States brace for budget hits

A sharp dip in state budgets six years ago created a difficult situation not only for governors and legislators concerned about citizen services, but also for contractors heavily invested in the state government market. The thought on everyone's mind now is whether states have fallen on hard times again so soon.

Nearly all stage budgets experienced severe shortfalls in 2002-2003. Already this year some states are again announcing shortfalls and cutting budgets across the board, Scott Pattison, executive director at the National Association of State Budget Officers, told attendees at a state and local government conference in Washington this week. He was one of three speakers on a panel devoted to state budget and tax matters.

States are now in a "downward trend cycle," Pattison said. The numbers tell the story. Eighteen states are predicting budget shortfalls totaling $13.9 billion in fiscal 2008, he said, and 16 states are anticipating shortfalls amounting to $30.3 billion in fiscal 2009.

"Fiscal years 2009 and 2010 are looking particularly bad now," he said.

The return of budget gaps means that states will be scouting hard for alternative sources of revenue, Pattison said. "The pressure will be intense to find revenue in every way possible."

One suggested way to do this is to lease toll roads to private firms. Another is to establish public-private partnerships for infrastructure improvements.

Corina Eckl, director of fiscal affairs at the National Conference of State Legislatures, noted that state revenue growth has dropped from 4.2 percent in fiscal 2007 to 3 percent in fiscal 2008. She said that more than one-third of the states in the first quarter of fiscal 2008 expressed concern over their budget situations. To put this in context, state revenues in 2005 and 2006 were up around 7 percent to 9 percent.

State fiscal years run from July 1 to June 30. Noting that the first half of the state fiscal year is typically more stable than the second half, Eckl said states are likely to face serious problems in the near future.

Pattison said 63 percent of the funding assistance that states get from the federal government is channeled directly to Medicaid and to education. A host of other pressing needs, such as disaster recovery and emergency response, must draw from the remaining 37 percent, he said.

In addition to Medicaid and education, states are grappling with other tough issues that siphon away discretionary funds such as pensions and transportation infrastructure.

Spending growth will slow in the short term and could dramatically slow over the long haul, Pattison said. "States are going to experience fiscal pressure for a long time to come."

Harley Duncan, executive director at the Federation of Tax Administrators, reported decreasing revenue from individual, sales and corporate taxes over the last few months. Echoing the comments of the other panelists, he said, "This could get rather ugly pretty quick."