July 18, 2012

New Report Suggests State Budget Woes Will Continue

A new study from the State Budget Crisis Task Force concludes that in many states, anticipated revenues will be insufficient to cover mounting Medicaid enrollment caseloads, underfunded pension commitments, and local government budget obligations. The authors focused their investigation on California, Illinois, New Jersey, New York, Texas, and Virginia. They predicted that anticipated revenues (from sales, income, or other taxes) would be both insufficient to cover expenses and fairly instable, as personal income remains volatile and unemployment (and underemployment) high. In other words, we are edging towards the state budget precipice, even as the national economy distances itself from the official end of the Great Recession proclaimed in 2009.

These conclusions are not unfamiliar to readers; we recently blogged about state-level fiscal uncertainty and sluggish revenue growth. However, this study sheds additional light on the subject, being the first to make a comprehensive assessment of the tension between mounting expenses and shaky revenues in highly populated states.

While Washington State continues to experience slow economic growth in some sectors and in its generation of tax revenue, the Economic Revenue and Forecast Council (ERFC), in its July collections report, refrained from making any firm economic revenue projections due to the excessive variability of receipts. The ERFC report also emphasized slowing job growth: while reducing state unemployment by 0.5 percent would require 160,000 new jobs each month, the state only added 80,000 new jobs in June.

While anticipated revenue is increasing slightly, the downside risks of a second recession brought on by the debt crisis in Europe, disappointing job growth, and depressed consumer confidence are significant. Despite these concerns, ERFC predicts slight revenue increases for both the 2011-13 and 2013-15 biennia, due to legislative action from the 2012 supplemental budget.