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Like Feds, States Deep In Red Too

Amid all the voter hang-wringing about rising federal deficits, the overlooked fiscal story is the budgetary problems handcuffing almost every state government. All but two states–Montana and North Dakota–started the year with a budget deficit, and all but nine state are facing projected shortfalls again so far this year, according to a recent report by the Center on Budget and Policy Priorities.

California, with its direct democracy-fueled fiscal inanity, is in the worst shape; its current budget gap is more than half its general fund budget, the only such state above the 50 percent threshold. But eight other states join California with a combined carry-over and mid-year budget gap of at least 30 percent of its general fund budget. The map above is reproduced from data in Table 2 of the CBPP report. Looking at those states in the most trouble, obviously the mortgage and foreclosure crisis explains why states like Arizona and Nevada join California in the group of nine with the biggest projected 2010 shortfalls. But another 23 states have estimated shortfalls of 20 percent or more.

The report’s summary warns that matters will get worse before they get better:

As we look ahead to 2011 and beyond, even as the economy appears to be moving in the direction of recovery, states’ fiscal prospects remain extremely weak. Indeed, historical experience and current economic projections suggest 2011 will be worse than 2010…

Unemployment, which peaked after the last recession at 6.3 percent, has already hit 10 percent, and many economists expect it to rise higher and remain at high levels throughout 2010 and beyond. Continued high unemployment will keep state income tax receipts at low levels and increase demand for Medicaid and other essential services that states provide. High unemployment and economic uncertainty, combined with households’ diminished wealth due to fallen property values, will continue to depress consumption, thus sales tax receipts also will remain low. These factors suggest that state budget gaps will continue to be significantly larger than in the last recession, and last longer.

That’s not the end of the bad news awaiting states in the next few years. As the report reminds us, the situation in states would be far worse right now if the feds hadn’t taken on additional debt in order to help state budgets–help that may not be there next year:

The amount in [The American Recovery and Reinvestment Act] to help states maintain current activities is about $135 billion to $140 billion over a roughly 2 ½-year period—or between 30 percent and 40 percent of projected state shortfalls. Most of this money is in the form of increased Medicaid funding and a State Fiscal Stabilization Fund…This money has reduced the extent of state spending cuts and state tax and fee increases.

But it now appears likely the federal assistance will end before state budget gaps have abated. The Medicaid funds are scheduled to expire in December 2010, which is just halfway through the 2011 fiscal year in most states. States will have drawn down most of their State Fiscal Stabilization Fund allocations by then as well. So even though the 2011 budget gaps may well be larger than those for 2010, there will be less federal money available to close them.

State governments are a long way from getting out of the woods. Rising unemployment and stagnating wages for those who are employed reduce both federal and state income tax receipts, but states also get hit with losses from declining property tax assessments and foreclosures. Meanwhile, with pressure mounting on the Obama Administration to reduce spending, the states can no longer look to Washington for help, or at least not for as much help, in coming years.