State Fiscal Conditions

On May 5, Scott Pattison, Executive Director of the National Association of State Budget Officers (NASBO), spoke to the Tax Economists Forum, a Washington, DC based group of public finance economists, about the current condition of state finances and the outlook for the future. To briefly summarize Mr. Pattison’s presentation: the current fiscal condition of state governments, as a whole, is as bad as any time since the Great Depression of the 1930’s. For example, ongoing aggregate budget gaps for the current fiscal year are expected to be about $110 billion. NASBO projects the ongoing budget gaps for the next two fiscal years to be around $60 billion. Prior year budget gaps have been filled by Stimulus funds from the federal government, expenditure cuts, drawing down accumulated balances in “rainy day” funds, and some tax rate increases.

According to Mr. Pattison, the states will recover very slowly even if overall economic conditions improve substantially. One major factor in the slow recovery is the reduction in Stimulus funds in the coming fiscal years. Other factors include the uncertainty surrounding the housing and commercial real estate markets. If home foreclosures rise and if commercial real estate developers cannot obtain financing, property tax revenues, the main source of local government tax revenues, could fall, which would put pressure on state governments to increase aid to their local governments. The current instability of the financial markets in the last few days also clouds the fiscal outlook for state and local governments.

A link to Mr. Pattison’s presentation is provided here (pdf).