Out of Control Policy Blog

NGA & NASBO: States Facing Fiscal "Lost Decade"

States' fiscal crises are going to stay put for some time. That's the word from the National Governors Association and the National Association of State Budget Officers, who released two reports today forecasting continued fiscal woe for states over the next decade. From the press release (emphasis mine):

The weakening of state fiscal conditions is reflected in the $250 billion in budget gaps faced by states between fiscal 2009 and fiscal 2011. Of the $250 billion, states closed $72.7 billion in budget gaps during fiscal 2009 and $113.1 billion before the enactment of their fiscal 2010 budgets to bring them into balance with drastically declining revenues.

"These are the worst numbers we’ve ever seen in the decades of putting together this report," said NASBO Executive Director Scott D. Pattison. "States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending in ways that impact every part of state government."

Even after closing these gaps, an additional $14.5 billion in budget gaps remains in fiscal 2010, and states face at least $21.9 billion in budget gaps for fiscal 2011. To help close these gaps, 42 states cut their enacted fiscal 2009 budgets by $31.2 billion, and 33 states cut their fiscal 2010 expenditures by $53.5 billion. Additionally, states enacted tax and fee increases of $23.8 billion along with additional increases in other revenue measures of $7.7 billion for fiscal 2010.

According to an NGA analysis titled The State Fiscal Situation: The Lost Decade, the recent economic downturn, one of the deepest and longest since the Great Depression, began in December 2007. Although the recession likely ended in August or September 2009, states struggled in fiscal 2009 and will continue to struggle through most of the decade.

"States will continue to struggle over the next decade because of the combination of the length and depth of this economic downturn, the projected slow recovery and the overhang of unmet needs," said NGA Executive Director Raymond C. Scheppach. "The unmet needs are those postponed or deferred during the crisis including, replenishing retiree pension and health care trust funds and financing maintenance, technology and infrastructure investments. States will also need to rebuild contingency or rainy day funds. The bottom line is that states will not fully recover from this recession until late in the next decade."

More privatization has to be part of the solution here—it's unavoidable. Most state policymakers are extremely resistant to cutting existing spending and public jobs, but the severity of the problem makes these things necessary and inevitable. Banking on tax hikes and revenue enhancements to close the gap is a fantasy—even if there was the political and popular will to raise taxes in a tough economy (which there isn't), taxpayers would never stand for the level of tax increases it would take to close the massive budget deficits on the table for the next few years.

You can't avoid cutting the size and scope of government, regardless of what happens on the tax and fee side. Given that reality, privatization is a strong tool to deploy and will become a critical part of smart fiscal management in the near term. Done well, you can get more bang for fewer tax dollars while still ensuring the quality delivery of services. Win-win for the budget and taxpayers.

Louisiana has already figured this out. Hopefully other states will start to follow their lead.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Leonard Gilroy is Director of Government Reform


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