The Grim State of the States: The Fiscal Crisis Facing State and Local Governments

Source: James Heintz, New Labor Forum, Vol. 18 no. 2, Spring 2009
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From the abstract:
The collateral damage of the global financial crisis is extensive–record job losses, falling incomes, and increasing uncertainty that paralyzes workers, consumers, and investors alike. State and local governments have joined the list of casualties. They are facing the worst budget crisis in decades and the situation will likely get worse before it gets better. If not enough is done, the fiscal crunch will have far-reaching implications for the severity of the crisis and the well-being of the American people.

A sample of the current budget situation from the 50 states shows that the fiscal crisis has spread nationwide. At the time of this writing, Arizona is projecting a $1.6 billion shortfall at the state level for the 2009 fiscal year, and this is expected to expand to $3 billion for fiscal year 2010. Georgia State University has recently forecast that Georgia’s revenues will drop by 6 percent in fiscal year 2009, opening up a $2.5 billion gap. Minnesota must accommodate a $426 million deficit in the current fiscal year which is projected to grow to $4.8 billion in 2010-2011. New York is anticipating a $1.6 billion current-year shortfall and this is expected to climb to an unprecedented $13.8 billion gap in the 2009-2010 fiscal year. The list of states facing severe financial problems goes on and on. According to the Center on Budget and Policy Priorities, a Washington, D.C.-based research institute, as of January 2009 at least 46 states have reported facing budget shortfalls for the current and/or the next fiscal year, totaling an estimated $99 billion.

These are just the initial estimates of the impact that the economic crisis will have on state revenues and budgets. The severity of the budget crisis ultimately depends on how long and how deep the downturn becomes and the degree of ongoing state support that the federal government ultimately provides over the next several years. Depending on the trajectory of the crisis, the Center on Budget and Policy Priorities forecasts that the combined state-level budget shortfalls may add up to over $350 billion by 2011. Keep in mind that these estimates do not reflect the problems that local and municipal governments are facing–which are equally severe and widespread. Despite the current uncertainty about just how bad the economic crisis will turn out to be, most state and local governments find themselves suddenly coping with the worst financial outlook in over half a century.

This is the second major fiscal disaster with which state and local governments have struggled in the past seven to eight years. The earlier crunch began around 2001 and followed the bursting of the dot-com stock market bubble, the corporate accounting scandals (epitomized by the Enron debacle), and the September 11th terrorist attacks. At the height of the crisis, state-level budget shortfalls amounted to an estimated $80 billion–smaller than the gap which states face in the current fiscal year. The critical difference is that the current shortfall represents just the beginning of a more extensive meltdown. The gap will widen significantly before the economy turns around.

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