U.S. States Face `Significant Challenges' as Stimulus Aid Ends, Study Says

U.S. states expect “significant challenges” balancing budgets in the next two years, after closing $230 billion in gaps since 2009, as U.S. stimulus aid drops and tax receipts recover from the recession, a study said.

While state spending is set to rise for the current fiscal year compared with 2010, after two straight annual declines, governments will face renewed pressure in 2012, according to the study released today by the National Governors Association. The budget period begins in July in 46 states.

“After two of the most challenging years for state budgets, fiscal 2011 will present a slight improvement” in spending after a 7.3 percent drop in 2010, said the study by the governor’s group and the National Association of State Budget Officers. It said 11 governors still face a total of almost $10 billion in gaps that must be closed by the fiscal year’s end.

States from New Jersey to California are dealing with imbalances that have persisted since the economy lapsed into recession in December 2007. A reliance on year-end surpluses and so-called rainy-day funds to cover gaps has left 48 states, excluding Alaska and Texas, with enough in those accounts to pay for 2.8 percent of this year’s planned spending, down from a high of 10.6 percent in 2006, according to the study.

So far, 23 states are forecasting a total of $40.5 billion in fiscal 2012 budget deficits, and 17 are projecting $40.9 billion in imbalances in the following year, according to the report. More deficits are likely as additional states provide their forecasts.

Rising Revenue

State tax revenue rose 3.9 percent in the third quarter compared with a year earlier, the third-straight gain, the Nelson A. Rockefeller Institute of Government in Albany, New York, said yesterday. Its study used data from 48 states.

While tax collections have stabilized since the nation’s economy began expanding in June 2009, total state revenue this year will be 6.5 percent below the 2008 level, according to the report from the governors association. Officials also will be forced to balance 2012 budgets largely without the federal help they’ve relied on since 2009, under President Barack Obama’s two-year $814 billion economic-stimulus program.

Through the 2011 budget cycle, states are expected to have used $151 billion of stimulus aid to help balance their budgets, according to the study. About $43.2 billion of the federal funds is committed under current spending plans.

Declining Aid

“Fiscal 2012 presents a very difficult situation with the end of these funds,” the groups said. Doing without that money, “when combined with an extremely slow recovery in state revenue collections, could result in severe cuts to state programs and services,” they said.

States are responsible for funding part of Medicaid, the federally subsidized health-care program for the poor, as well as schools, transportation projects and public safety. Demand for Medicaid, which provides for more than 60 million people, grew as U.S. unemployment rose during and after the recession, peaking at 10.1 percent in October 2009, the highest level in 26 years. The jobless rate declined to 9.6 percent by October 2010.

The lingering strains present a challenge to the new slate of governors set to take office around the country next month. Republicans on Nov. 2 won a majority of governorships, taking back seats Democrats won in 2006 and making headway in cash- strapped states from Pennsylvania to Michigan.

“Stimulus funds provided a two-year buffer,” said Tom Kozlik, a municipal credit analyst for Janney Montgomery Scott LLC, a broker in Philadelphia. “Now, political actors need the political will in order to take action and reduce state and local government expenditures, increase revenues, or do both.”

Across Party Lines

In Ohio, Republican Governor-elect John Kasich campaigned on promises to lower taxes. Others including Pennsylvania’s Tom Corbett and New Mexico’s Susana Martinez have targeted state jobs or program budgets.

The plans to reduce spending cross party lines. California Democrat Jerry Brown, who will take over in Sacramento, has said that voters aren’t interested in tax increases. In Maryland, re- elected Democratic Governor Martin O’Malley said this month that he aims to spare areas such as college affordability from the biggest cuts as he deals with a $1.2 billion budget gap.

“We have a lot of tough decisions before us and we’re going to be on a constant diet of deep and painful cuts,” he said shortly after the election.

The report points to some signs of recovery. General-fund revenue, the money that lawmakers rely on when drafting budgets, is projected to increase 4.4 percent to $636.3 billion during the current budget year. Spending is set to rise 5.3 percent, to $645.1 billion, according to the study.

Next Year’s Deficits

The fiscal straits in state capitals may trickle down to localities that rely on aid for schools and other programs, said Kozlik, the Janney analyst. “Lower state support is definitely a negative credit factor for local governments,” he said.

In Newark, New Jersey’s biggest city, Mayor Cory Booker fired 15 percent of the police force to save $9.5 million, a step driven in part by Republican Governor Chris Christie’s decision to cut state funding. In Michigan, reductions in aid are compounding municipal fiscal strains triggered by slides in property taxes of as much as 20 percent over the past year.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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