Out of Control Policy Blog

NGA: State Fiscal Conditions Continue to Deteriorate

The National Governors Association has released its March 2009 State Economic Review, and the state fiscal outlook remains bleak:

The revenue outlook in the states continues to deteriorate rapidly. On March 12, the Nelson A. Rockefeller Institute of Government released updated revenue collections data for the fourth quarter of 2008. Its report shows that overall state tax revenues declined 3.6 percent in the fourth quarter relative to the previous quarter, with sales tax declining 5.9 percent, personal income tax declining 0.4 percent and corporate income tax decreasing by 9.3 percent. Total revenue collections declined in 35 of the 47 reporting states. Unfortunately, first quarter 2009 revenue collection figures may be even worse than the fourth quarter of last year. Several states have reported that their February revenue collections are 10 to 20 percent less than the same time last year.

Additionally, a number of states failed to meet already lowered revenue projections in January and February. While funds from the American Recovery and Reinvestment Act (ARRA) are helping states partially address budget shortfalls, recently released lower-than-projected revenue collection figures are forcing states to continue such actions as additional program cuts, furloughing state employees, increased use of rainy day funds and possible tax and fee increases.

NGA goes on to note that stimulus money will run out before the anticipated revenue rebound, so the problem will be around for awhile:

ARRA provides more than $275 billion in grants to states, and through states to individuals, much of it targeted to fiscal years (FYs) 2009 and 2010. The most flexible portions of that funding—provided through Medicaid and the State Fiscal Stabilization Fund—total about $135 billion. [...]

The current downturn began during FY 2008 (in December 2007). History would suggest that state revenues may therefore bottom out in FY 2010 but not fully recover until FY 2012 or even later, depending on the severity of the revenue collapse. Since virtually all of the federal aid provided under ARRA must be obligated by September 30, 2010, states are likely to face at least two more years of weak revenues without federal assistance to cushion the blow.

According to Rockefeller, the size of the gaps states will have to fill could range from 2.2 percent in FY 2011, growing to 4 percent in FY 2012 under its best-case scenario, and as much as 6 percent in FY 2012 under a worse (but not the worst-case) scenario. The former estimates assume the state revenue “collapse” is somewhat worse than that of 1990, but not as bad as 2001. The second assumes the collapse is worse than 2001.

The silver lining here is that policymakers are going to face sustained pressure to streamline and reduce the price of government, and privatization will become an increasingly critical piece of the policy option set. I suspect we're going to see more efforts like these in Louisiana, Arizona, and Illinois.

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Leonard Gilroy is Director of Government Reform


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