States face $41 billion in budget gaps

NEW YORK (CNNMoney.com) -- The nation's battered state governments face a collective $41 billion budget gap next fiscal year, a survey released Wednesday found.

State officials will have to contend with slow revenue growth, increased spending demands and the end of federal stimulus assistance next year, according to the semi-annual Fiscal Survey of States, released by the National Governors Association and the National Association of State Budget Officers.

"Many budget and governor's offices are telling us that fiscal 2012 could be even worse because so many painful choices have already been taken and more need to be taken as we go further," said Scott Pattison, head of the state budget officers' group.

The start of the 2012 fiscal year is still seven months away for most states, but the gaps are already appearing.

Some 23 states are reporting a total of $41 billion in budget shortfalls. And 11 states must close $10 billion in deficits before the current fiscal year ends.

Total revenues this year are forecast to be $636 billion.

The cutting has already begun even though the current fiscal year is not even half over: 14 states have already slashed $4 billion.

States are also hiking taxes and fees to the tune of $6 billion in fiscal 2011, after increasing them by nearly $24 billion in the previous year. And the relied on $43 billion in federal Recovery Act funds, primarily to help cover the costs of Medicaid and education.

"The significant wind down of this support will result in a continuation of extremely tight fiscal conditions for states and could lead to further state spending cuts," the report said.

The Great Recession has hit state governments hard. Over the past three fiscal years, states have closed $230 billion in budget gaps. They have slashed spending for education, social services and public safety. They've cut the state workforce and reduced aid to local governments.

And they've raided their rainy day funds, drawing them down to a total 2.4% of expenditures when the flush states of Alaska and Texas are excluded. Budget experts recommend states hold 5% of expenditures in reserve.

State revenues are expected to pick up a little this year as the national economy slowly recovers. Sales, personal income and corporate income taxes are projected to rise 5% in fiscal 2011. That's a welcome change from the revenue drops of recent years. In fiscal 2010, for instance, collections were 2.7% lower than the year before.

But general fund revenues have a long way to go before they return to pre-recession levels. The total expected fiscal 2011 revenues are 6.5% below fiscal 2008 levels.

Spending is also expected to rise. State general fund expenditures are budgeted to increase 5.3% this fiscal year.

Still, the future doesn't look bright for states, which typically recover two years after the nation's economy. Seventeen states are already reporting nearly $41 billion in budget gaps for fiscal 2013.

And states are likely to suffer $175 billion in gaps over the next three years, said Raymond Scheppach, executive director of the governors association.

The federal government is not expected to step in to help the states, as it did in 2009 with the Recovery Act. While governors successfully lobbied their representatives for more Medicaid assistance, they are not asking for additional funding and Congress is not likely to provide any, Scheppach said.