State Budget Update:  November 2009

The state revenue nightmare continues. Officials were hopeful that fiscal year (FY) 2009 would mark the bottom of the revenue plunge, but their hopes have been shattered. Not only have revenues continued to fall below expectations, they are projected to be anemic for years to come. This means another round of budget gaps, certainly in FY 2010, but even beyond in many states.

State lawmakers closed a cumulative budget gap of $145.9 billion in their FY 2010 budgets. This was on top of the gaps they closed in FY 2009 and for many, the ones they faced in FY 2008. Now, midway through FY 2010 for most states, new gaps have opened. And that will not be the end of it. The longest economic downturn in decades appears to be well entrenched and is manifesting itself in multi-year budget shortfalls. Many states already foresee budget gaps in FY 2011 and FY 2012. It is hard to see when they will end.

Ironically, a contributing factor to future state budget gaps is the end of federal stimulus funds provided by the American Recovery and Reinvestment Act (ARRA). Those additional funds supported state budgets in FY 2009 and, to an even greater extent, in FY 2010. That money recedes in FY 2011 and, when it is gone, will leave big holes in state budgets—what many state officials are calling the “cliff effect.”

Despite a growing consensus that the national recession—the principal cause of state fiscal problems—has ended, state finances will not recover in the near term. History shows that state budgets continue to struggle long after a recession ends. The information in this report is further evidence of that fact.

This report provides information on all 50 states and Puerto Rico. It is based on data collected from legislative fiscal directors in November 2009. It includes information on:

• New FY 2010 budget gaps;
• Revenue performance for major tax categories (through October 2009 for most
  states);
• The outlook for revenue performance for the remainder of FY 2010;
• Projected FY 2010 revenues compared to FY 2009 collections;
• Spending overruns in FY 2010;
• A summary of the current state fiscal situation;
• A longer view of state revenue performance;
• Projected budget gaps in FY 2011 and FY 2012; and
• A special focus question on when states entered the recession and when they expect
  to exit it.