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Tuesday, January 29, 2013

State Government Fiscal Stress and Federal Assistance

Robert Jay Dilger
Senior Specialist in American National Government

No two state budgets are alike. States have different budget cycles, different ways of preparing revenue estimates and forecasts, different requirements concerning their operating and capital budgets, different roles for their governors in the budget process, and different policies concerning the carrying over of operating budget deficits into the next fiscal year.

Although no two state budgets are alike, all 50 states experienced heightened levels of fiscal stress during and immediately following the national economic recession, which officially lasted from December 2007 to June 2009. For example, state tax revenues from all sources, including sales, personal, and corporate income taxes, fell 10.3% (from $680.2 billion to $609.8 billion) from FY2008 to FY2010. The decline in state tax revenue, coupled with increased demand for social services and state-balanced operating budget requirements, created what the National Association of State Budget Officers (NASBO) characterized as “one of the worst time periods in state fiscal conditions since the Great Depression.”

States closed nearly $230 billion in state budget shortfalls in FY2009 and FY2010; and $146.3 billion in state shortfalls in FY2011 and FY2012. Although state fiscal conditions have improved in recent years, state budget officers predict continuing budgetary challenges in virtually all states in FY2013, in part due to slow state revenue growth, the withdrawal of temporary federal assistance provided through P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), the need to replenish reserves, and increased costs for health care and other social services.

Congressional interest in state budgetary finances has increased in recent years, primarily because state action to address budget shortfalls, such as increasing taxes, laying off or furloughing state employees, and postponing or eliminating state infrastructure projects, could have an adverse effect on the national economic recovery. Also, if states reduce their service levels there could be additional pressure for the federal government to provide those services, and as funding from ARRA expires, there could be additional pressure for the federal government to provide additional federal assistance to states.

This report examines the current status of state fiscal conditions and the role of federal assistance in state budgets. It begins with an overview of state budgeting procedures and then provides budgetary data comparing state fiscal conditions in FY2008 to FY2012. The data indicate that (1) recent improvements in the national economy have enabled many states to increase their general fund spending, but state fiscal stress is not expected to improve significantly because of the expiration of ARRA-funded state federal assistance and expectations that federal budgetary constraints may lead to further declines in state federal assistance in the future; (2) total state expenditures increased throughout the FY2008 to FY2012 period, but increased by just 0.013% in FY2012, primarily due to the expiration of ARRA-funded state federal assistance; (3) states are more reliant on federal assistance today than in FY2008, but state budget officials anticipate a gradual decline in federal funds over the next several years due to federal budget constraints; and (4) states experienced varying levels of fiscal stress from FY2008 to FY2012. This report concludes with an assessment of the consequences current levels of state fiscal stress may have for the 113
th Congress.

Date of Report: January 16, 2013
Number of Pages: 34
Order Number: R41773
Price: $29.95

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