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State Fiscal Outlook: It's bad and it's going to get worse before it gets better

It's bad:

According to data from the U.S. Department of Commerce, Bureau of Economic Analysis, total state and local government surpluses fell from a record high of $63.1 billion) in the second quarter of 2006 to a deficit of $103.6 billion in the third quarter of 2008, the latest data available (both figures are seasonally adjusted at annual rate).  Total state and local government surpluses were $4.7 billion in the third quarter 0f 2008. Total state and local government borrowing went from $33.4 billion in the first quarter of 2006 to more than $200 billion in the third quarter of 2008. See the accompanying chart for state and local budget deficits and surpluses and net borrowing from the first quarter of 1990 to the third quarter of 2008.

It's going to get worse:

That was the conclusion drawn by Scott Pattison, Executive Director of the National Association of State Budget Officers at the January 14th meeting of the Tax Economists Forum meeting in the Hall of the States. Mr. Pattison noted that most states are now in recession and budget shortfalls are more than $30 billion annually. Budget shortfalls of this magnitude; and the credit crisis should cause across the board budget cuts and layoffs in state governments down the road. Right now, states are sustaining expenditures by drawing down their balances. Total year-end balances are projected to decline from $70 billion in fiscal year 2006 to less than $50 billion in 2009. Similarly, the year-end balances as a percentage of expenditures is projected to be approximately 8 percent in 2009 - down from approximately 12 percent in 2006.

Compared to the recession of 2001, this downturn is more severe and broader based noted Mr. Pattison. In 2001, the housing sector remained strong and local governments were not particularly hard hit. In addition, credit markets remained strong in 2001.

Mr. Pattison predicted that the fiscal impact on states will depend on the performance of the national economy, but, there will be significant drops in both revenues and expenditures. He does not expect state budgets to recover until fiscal year 2011 and perhaps even later than that. On the positive side, Mr. Pattison noted that states would be forced to set budget priorities and implement other necessary reforms. See the link for Mr. Pattison's January 14th presentation.