U.S. States Plan More Restraint After Cutting Spending Two Straight Years

U.S. states reduced spending for a second consecutive year as the longest U.S. recession since the 1930s cut tax revenue, a survey by two associations said.

Governors may struggle to raise spending in fiscal 2011, which begins July 1 for 46 states, as they close deficits without the aid of federal stimulus money that runs out this year, according to a report by the National Governors Association and National Association of State Budget Officers.

States will have dealt with $296.6 billion of budget deficits from fiscal 2009 to 2012, covered in part by $135 billion of federal money received under stimulus legislation, the groups said. Governors still face $127.4 billion of deficits for the rest of fiscal 2010, 2011 and 2012.

“The federal government has helped states avoid even more significant cuts to state services and/or proposed tax increases,” according to the report, which the Washington-based associations publish twice a year based on a survey. “The loss of these funds combined with the anticipated slow recovery of state revenues is expected to result in the continuation of difficult state fiscal conditions.”

Warren Buffett, whose Berkshire Hathaway Inc. has been paring its municipal bond portfolio, yesterday predicted a “terrible problem” for the debt of states and local governments in coming years. Berkshire has cut its municipal holdings to less than $3.9 billion as of March 31, from more than $4.7 billion at the end of 2008, according to the company’s first-quarter report.

Below 2008 Levels

Buffett, Berkshire’s chief executive officer, in May predicted the U.S. probably would feel compelled to rescue a state facing “extreme financial difficulty” after it committed $700 billion to bail out financial firms and automakers. California, the most-populous U.S. state, is contending with a $19 billion deficit and Illinois faces a $13 billion gap.

In fiscal 2011, revenue is forecast to reach $495.8 billion, down 8.4 percent from 2008, according to the report. That may force 39 states to spend less than they did three years ago, the groups said.

Governors’ recommended budgets for fiscal 2011 forecast a 3.6 percent total spending increase to $635.3 billion from $612.9 billion in 2010, the first jump in three years, according to the report. That’s still 7.6 percent less than in 2008. Combined, state budgets fell 6.8 percent in 2010 and 4.3 percent in 2009, after rising 4.9 percent in 2008.

Tax Collections Drop

It may be a decade before states can spend at the same level as they did in 2008, association officials in Washington told reporters on a conference call. Sales and income-tax revenue, the source of 80 percent of state general funds, will be $477.4 billion for 2010, 12 percent less than collected in 2008, according to the report.

“States are still suffering from the recession,” Scott Pattison, executive director of the budget officers’ group, said in the press briefing. “States are still in fiscal peril.”

In fiscal 2010, 40 states including Florida, California and New York made mid-year budget cuts totaling $22 billion, according to the survey. During the year, states raised taxes and fees by $23.9 billion.

Spending is estimated to drop 6.8 percent to $612.9 billion in fiscal 2010 from $657.9 billion in 2009, the groups said. Revenue for 2010 is below original projections in 46 states.

States have already pared expenses, including 48,000 jobs, as the recession forced up unemployment and pushed down property values, cutting tax revenue, Raymond Scheppach, executive director of the governors association, told reporters. Finding more spending reductions may mean taking more from schools and health care, he said.

“Where do you go for the rest of the cuts?” asked Scheppach. “They will have to cut more jobs.”

Job Losses Projected

“In the year ahead, state budget-closing actions could cost the economy up to 900,000 public- and private-sector jobs without more federal help,” said Nicholas Johnson, director of the state fiscal project at the Washington-based Center on Budget & Policy Priorities, a research group.

“When states cut spending, they lay off teachers and police officers and cancel contracts with vendors,” Johnson said in a prepared statement. “The impact then ripples through the wider economy as laid-off workers spend less at local stores, putting more jobs at risk.”

Quarterly Revenue Decline

The majority of U.S. states had a drop in revenue last quarter over the same period in 2009, the Albany-based Nelson A. Rockefeller Institute of Government said today in a report.

According to the survey by the governors group, financial pressures from the recession have reduced year-end aggregate balances to 2.2 percent of general fund expenditures in 48 states for fiscal 2010, excluding Texas and Alaska. Including those two, reserve balances were 6.2 percent, down from a peak of 11.5 percent in 2006.

Any reserve fund below 3 percent is considered low, Pattison said.

This year, residents of 37 states will vote for governors, including 15 incumbents seeking re-election, according to the governors association. The four states that don’t begin their fiscal years on July 1 are Alabama and Michigan, which start Oct. 1, Texas, which starts Sept. 1, and New York starting April 1. Twenty-one states operate on two-year budgets.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

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