What Will Happen to State Budgets When the Money Runs Out?

Source: Donald J. Boyd, Nelson A. Rockefeller Institute of Government, Fiscal Features, February 19, 2009

  • The federal stimulus package will provide fiscal relief to state governments exceeding $150 billion over the 2008-09, 2009-10, and 2010-11 state fiscal years.
  • Although the aid is massive, it is temporary. In the best of worlds, as the stimulus aid wanes, the economic recovery will take hold and state tax revenue will rise sharply, as it has after past recessions.
  • But even under optimistic assumptions, the revenue recovery will not be sharp enough or soon enough to avoid the need for significant budget cuts or tax increases. If the tax revenue falloff and recovery aremuch like that of the 1990 fiscal crisis, as the stimulus aid goes away in 2011-12, states could face a fiscal gap of 4 percent of general expenditures, roughly comparable to annual gaps of $70 billion.
  • Under alternative assumptions that lead to pre-stimulus budget gaps of nearly $370 billion over the next 2.5 years–not a worst-case scenario–states could face a 2011-12 fiscal gap of more than 6 percent of state general expenditures, or more than $100 billion. Under any likely scenario, states will face significant budget problems when the new federal aid runs out.
  • States should use the breathing room provided by the stimulus package to mute and spread out baseline spending cuts and/or tax increases they will need to make, to restructure programs, and to allow for orderly decisionmaking. But they cannot count on it to substitute for these difficult decisions.

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