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December 8, 2010

No Relief for State Budgets: Shortfalls to Continue for Several Years

A recovering national economy is stabilizing state revenues in fiscal year (FY) 2011, but the end of federal stimulus funds coupled with rising program costs will mean sizeable gaps in some state budgets.

DENVER-State lawmakers around the country will face a budget paradox when they convene their 2011 legislative sessions. On the one hand, an improving state revenue situation in the current budget year is helping to stabilize state budgets. On the other is a forecast for significant budget gaps in the next fiscal year brought about in part by disappearing federal stimulus funds and growing program costs.

According to a new report, "State Budget Update: November 2010," by the National Conference of State Legislatures (NCSL), an increasing majority of state legislative fiscal directors are reporting that the revenue outlook for the remaining seven months of FY 2011 looks promising. At the same time, however, most states also are forecasting significant budget gaps in FY 2012.

"State legislators are being realistic about the budget situations facing their states,” said William T. Pound, executive director of NCSL. “But how they balance their budgets could be filled with as many twists and turns as the latest Harry Potter movie.”

Most legislators will be familiar with the budget balancing routine that lies ahead since they faced a similar task when adopting the FY 2011, FY 2010 and FY 2009 budgets.  For some, the new session will mark the fifth year in a row of having to balance their budgets, with gaps that go as far back as FY 2008. NCSL’s new report shows that six months into FY 2011, 35 states and Puerto Rico do not report a gap. But some are still facing ongoing shortfalls because of weak revenue performance, less-than-anticipated federal funding for Medicaid and expenditure overruns. Through Nov. 15 states have reported new FY 2011 budget gaps totaling $26.7 billion. This is on top of the $83.9 billion gap already resolved this fiscal year.

Additional budget gaps are expected in FY 2012 and FY 2013. Thirty-five states and Puerto Rico are projecting budget gaps in FY 2012. The sum stands at $83.2 billion for 32 of those states. Although fiscal analysts in Illinois, South Carolina and South Dakota did not report an estimated amount of a future gap, they did say that budget gaps are expected. Fifteen states do not currently project a gap for FY 2012. It is not surprising to see that some states foresee budget gaps into FY 2013. NCSL’s latest report shows that 24 states and Puerto Rico anticipate a budget gap in that fiscal year. The cumulative total for the 19 states already able to project an estimate is $65.4 billion. Twenty-six states have not yet projected a gap for FY 2013.

"State lawmakers are weary and wary as they look toward FY 2012," said Corina Eckl, NCSL fiscal program director. "Tackling severe and protracted budget shortfalls has been exhausting. But with more gaps looming and the range of options shrinking, the worst may be yet to come."

Funds from the American Recovery and Reinvestment Act (ARRA) have helped support state budgets since FY 2009. States will face a $37.9 billion loss in federal funds in FY 2012 compared to FY 2011, according to the Federal Funds Information for States. This is expected to make big holes in state budgets, what many state officials call the “ARRA cliff effect.” The diminished level of ARRA funds in the next fiscal year will be a challenge for state officials in program areas such as Medicaid and K-12 education. This means another round of budget gaps, certainly in FY 2012 but even beyond in some states.

Despite looming budget gaps in the next budget year, legislative fiscal office directors in 29 states and Puerto Rico reported a stable revenue outlook for the remainder of this fiscal year, compared to just four states at this time last year. Officials in 18 states reported that they are still concerned about the revenue outlook, and three states described their revenue outlook as optimistic for the remainder of FY 2011. In a testament to the improving national economic situation, no state officials reported  being pessimistic on their revenue outlook, compared to 13  that indicated a pessimistic outlook last November.

NCSL’s new report, "State Budget Update: November 2010," provides information on budgets in all 50 states and Puerto Rico. It is based on data collected from legislative fiscal office directors in November 2010. It includes extensive information on:

  • New FY 2011 budget gaps.
  • Revenue performance for major tax categories (through October 2010 for most states).
  • Spending overruns in FY 2011.
  • Projected budget gaps in FY 2012 and FY 2013.
  • Structural budget gaps.

This NCSL budget report continues NCSL's long tradition of providing accurate, comprehensive and nonpartisan data on state finances.

Credentialed members of the media may receive a free full copy of NCSL's "State Budget Update:  November 2010." The link to the report provided in this release does not contain links to the detailed 50-state tables. Please contact the press room for more on how to obtain a complete copy of NCSL's budget report.

NCSL is a bipartisan organization that serves the legislators and staffs of the states, commonwealths and territories. It provides research, technical assistance and opportunities for policymakers to exchange ideas on the most pressing state issues and is an effective and respected advocate for the interests of the states in the American federal system.