The Latest on State Budgets

We updated our analysis today of state budget shortfalls, which shows that states continue to confront major challenges as they craft their budgets for the coming fiscal year.  They face:

• For fiscal year 2012, one of the most difficult budget years on record. Some 44 states are projecting shortfalls totaling $112 billion for the year, which begins July 1 in most states. (See chart below.)  This figure is somewhat lower than in our previous version of this analysis, largely because of actions that Illinois took in its last legislative session that reduced the size of its 2012 shortfall.
• The loss of emergency federal assistance. Assistance through the 2009 Recovery Act and the August 2010 jobs bill has been a huge help to states, allowing them to balance their budgets with smaller budget cuts and tax increases than they would otherwise need to make.  But that aid will largely be gone by the end of fiscal year 2011.
• A long road to recovery. Already, 26 states are projecting shortfalls totaling $75 billion for fiscal year 2013, which begins in 16 months.  This number will likely grow once all states have prepared estimates.

The size of these shortfalls is daunting, especially given the expiration of emergency federal aid.   But as our survey of governors’ new budget proposals explains, states can balance their budgets while averting the most damaging cuts in services like education, health care, and public safety by tapping their “rainy day” reserves and raising additional revenue to replace the revenue lost due to the recession.

Indeed, some governors are doing just that.  Most, however, are pitching budget plans that rely solely on cuts.  Worse, a number of governors are proposing tax cuts, which would only dig their budget holes even deeper.  As a result, most budget proposals include a litany of reductions to core services that would likely weaken education, health care, and care for the elderly and disabled, among other things — as well as slow the state’s economy and diminish its prospects for long-term growth.

Fortunately, governors’ budget proposals are only the start of the budget process.  In enacting their states’ final budgets, legislatures can take a more balanced approach, one that reaches beyond spending cuts to make use of new revenues and remaining reserves.