Fiscal Outlook

After more than six months of partisan bickering, Washington leaders managed to avert default by stealing a page from the Reagan era.   The 74 page bill approved by Congress revives and amends Gramm-Rudman, the marquis deficit reducing legislation of the 1980’s.  The full impact of the deal won’t be known until Congress translates the loose spending targets in the legislation into specific program cuts through the annual appropriations process, but it is clear that federal funding for states is set to drop precipitously. 

With the clock ticking and rating agencies waiting to pounce, Washington remains locked in the grips of the debt ceiling saga. This typically minor agenda item has taken the forefront and brought all other legislation to a halt. Not only are the terms of the debt ceiling vote being followed closely by political insiders and outsiders alike, but the doomsday scenarios that could result from inaction also are being explored, analyzed and planned for. If last-minute negotiations fail, what will the implications be for states?

In 1950’s “All About Eve,” Bette Davis utters the famous quote: “Fasten your seat belts. It’s going to be a bumpy night.” Considering the fractured nature of the country and the continuing toll being taken by the aftermath of the Great Recession, state and national lawmakers might want to think about fastening their own seat belts.

Chapter 7 of the 2011 Book of the States contains the following articles and tables:

State governments play an important role in national and regional economic conditions and are subject to prevailing economic conditions. The Census Bureau’s official statistics provide a full picture of the early impact of the most recent recession from tax revenues to expenditures to employment.

The state fiscal environment remains very weak despite the turnaround in revenue growth. It  will be at least several years before many states see revenues return to their previous peak levels and several years more before revenues reach similar proportions of the economy. Though states may be less inclined to seek the tax rate increases that occurred after previous recessions, many are examining ways to tax cross-border activity more effectively.

The 2010 fiscal year was another difficult year for states. State revenue collections continued to fall, while general fund spending declined for the second year in a row, marking the first time state spending has declined in back-to-back years. Additionally, 39 states were forced to make midyear budget cuts. Fiscal conditions have improved somewhat for states thus far in the 2011 fiscal year. The number of states making budget cuts has declined and both revenue collections and spending have grown. However, states remain well below pre-recession levels even with the recent increases. States will have to continue to make difficult decisions in the 2012 fiscal year and beyond as Recovery Act funds wind down, spending demands remain high and revenues are slow to recover.

According to a new report out by UBS Investment Research, as many as 450,000 state and local government employees could be laid off in the upcoming fiscal year.   This is a significant increase compared to last fiscal year’s layoffs, which totaled about 300,000 positions.

The report goes on to say that the increase is largely due to the ending of ARRA funds, including enhanced Medicaid matching rates and the education jobs...

In response to mounting budget pressures, state governments have cut aid to local governments. At the same time, policymakers are calling for more efficiency at the local level in order to make the most of limited financial resources.

Rural states should prepare to have fewer federal dollars in their economies.  The Obama administration has proposed cuts in USDA funding and Congress has announced a ban on earmarks, which have historically been a boon to some rural areas.