After nearly three years of economic recovery, the crisis in state and local budgets continues to worsen. Even though state tax revenues are picking up, mandated spending obligations and the loss of federal stimulus money still put heavy pressure on state finances. The squeeze on local governments is intensifying, reflecting cutbacks in state aid and the effect of the housing recession on property taxes. All this will exert a downdraft on economic growth and employment in the coming year, and the strains will continue at least until growth in the private-sector economy shifts into a higher gear.
Fiscal 2012 will be one of the toughest on record, says the Center on Budget and Policy Priorities (CBPP). That’s because the options for eliminating the gaps between revenues and spending, as required by balanced-budget laws in 49 states except Vermont (which usually balances its budget anyway), are now fewer and more difficult. States already have acted to address gaps totaling $431 billion heading into the fiscal years 2009, 2010, and 2011. The economy isn’t helping much. Last week the Commerce Dept.’s second estimate of first-quarter GDP left growth unchanged at the originally reported annual rate of 1.8 percent, down from 3.1 percent in the fourth quarter. Economists had expected an upward revision.
For fiscal 2012, 44 states and the District of Columbia, project budget shortfalls totaling $112 billion, says the CBPP. These gaps come at a time when rainy-day reserves are essentially depleted and federal assistance under the Recovery Act, which had played a big role in closing earlier shortfalls, is set to drop by more than $50 billion.
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