Closing State Budget Gaps
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Faced with one of the worst economic recessions to hit America in the last few decades, state governments are experiencing severe cuts in budgetary expenditure. General fund expenditures in fiscal year (FY) 2009 declined by 2.2 percent compared to the previous year. And the outlook for the foreseeable future is no rosier. The National Association of State Budget Officers estimates that states will likely face $230 billion in budget gaps from now through FY 2011. The Center on Budget and Policy Priorities forecasts an even bleaker picture: a cumulative state fiscal gap of $350 billion by the end of FY 2011. The bottom line: the state crisis is not going to go away this year or even next year. Systemic, structural changes will be needed.
Four Factors to Understanding the State Budget Crisis
- Carryover from the last recession. State governments have not had the time to recover from the previous recession in FY 2001
- Not enough time to refill coffers. Given that they had only around three years to build up their coffers and prepare for the current crisis, it is not surprising that many find themselves in the unenviable position of not being able to dip into large rainy day funds.
- Recent rise in expenditure. State government expenditure has grown exponentially since 1960, especially in the last few years when expenditures have far outstripped revenues
- Systemic, structural change necessary. Most states did not do enough to to tackle some of the long-standing fiscal issues during the recent good times or systematically reduce their expenditures during the last recession.
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State governments have tried a number of ad hoc measures to overcome this crisis, including layoffs and furloughs, increasing “sin” taxes and using rainy day funds. These band-aid measures, however, are unlikely to fix the structural budget problems faced by many states, exacerbated by the dark clouds looming on the horizon—the state and local pension crisis, ballooning Medicaid spending, and the aging of the population.
A complete overhaul of the machinery of state government is needed. States will have to reduce structural costs to both restrict the impact of the current crisis as well as prevent such deep malaise from afflicting them in the future. This, in turn, will require reforms ranging from tactical measures that control costs immediately, such as realigning headcount, to medium and long-term measures involving structural changes in state programs and organizations.
