What Next for State Budgets When Temporary Stimulus Funds Expire?

Last week, the National Conference of State Legislatures released preliminary findings from the first survey of states on the proportion of budget deficits they’ve patched using temporary stimulus dollars. As reports:

Whether they welcomed or snubbed the federal economic stimulus package, state lawmakers took advantage of the bailout dollars this year to help patch their state’s shaky finances.

Now, as they start thinking ahead to next year’s budget and the 2010 elections, lawmakers are increasingly apprehensive about what will happen when the stimulus money dries up. They predict even deeper cuts in services, higher taxes and raids on rainy day funds to balance budgets.

“What’s the exit strategy when this is over?” asked state Rep. Steven Costantino, a Democrat from Rhode Island who heads the House Finance Committee. “The stimulus is really a one-shot infusion that at some point ends.”

Most of the $275 billion that states will receive from the $787 billion package will be spent in fiscal 2009, 2010 and 2011 budgets, with fewer dollars available in fiscal 2012.

The role of stimulus funds in helping soften the recession’s blow on state budgets this year is clear from a newly released preliminary survey of half the states by the National Conference of State Legislatures. All of the 25 states surveyed said they used federal stimulus dollars for more than 20 percent of their gap-closing solution. The survey also shows how vulnerable states are as many start preparing for fiscal 2011 budgets. […]

But states probably cannot avoid a drop in spending money when the stimulus money stops coming, the survey said, because the growth in tax revenue will be too slow. “State revenue performance is not expected to rebound strongly enough to make up for lost (stimulus) funds,” said the survey, which was presented July 22 at NCSL’s annual legislative summit in Philadelphia by NCSL fiscal specialist Corina Eckl. She said she hopes the completed survey, with results from all 50 states, will be finished this summer.

Standard & Poor’s chief economist David Wyss told the summit that although the economy is improving slightly, states won’t feel it for several years because of the lag time between a recovery and increases in state tax revenue.

I discussed the most recent (and foreboding) NCSL State Budget Update in this post last week (see here also).

As I wrote recently here and here, states are largely papering over its current budget deficits through the use of temporary federal stimulus dollars, largely avoiding politically unpopular cuts in state services and programs. But with revenue declines and budget deficits projected to continue for several years, state policymakers need to get serious about reducing the price of government and ensuring fiscal sustainability, as the stimulus gravy train certainly won’t last forever.

States should look south to Louisiana for one strong policy approach. In a proactive effort to address a looming fiscal crisis set to hit in fiscal year 2012 with the expiration of temporary federal stimulus funds, Louisiana Governor Bobby Jindal signed an executive order in April 2009 establishing a new Commission on Streamlining Government (CSG) to find ways to reduce the cost of state government through downsizing, streamlining and privatization. The State Legislature subsequently codified the CSG into law in Senate Bill 261, approving the bill unanimously in both legislative houses in June 2009. The CSG is set to have its first meeting today and is targeting the release of its package of recommendations for early 2010 to get a step ahead of the 2011 and 2012 budgets.

Like Jindal and the Louisiana legislature, policymakers in other states need to see the fiscal handwriting on the wall—projected budget deficits for several more years, exacerbated by the expiration of stimulus dollars—and start taking serious steps to reduce the size and price of government.

Reason Foundation’s Privatization Research and Commentary