State Government Fiscal Stress and Federal Assistance

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 have experienced fiscal stress in recent years, especially during FY2009 and FY2010. The national economic recession, which officially lasted from December 2007 to June 2009, led to lower levels of economic activity throughout the nation and reduced state tax revenues. State tax revenues from all sources, including sales, personal, and corporate income tax collections, fell from $680.2 billion in FY2008 to $609.8 billion in FY2010, a decline of 10.3%. 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. State fiscal conditions improved during FY2011 and FY2012, and are projected to continue to improve in FY2013. However, states continue to experience fiscal challenges. For example, although state general fund revenue is projected to surpass pre-recession levels in FY2013 by about $13 billion (from $680.2 billion in FY2008 to $692.8 billion in FY2013), total general fund spending is projected to remain below pre-recession levels in FY2013 (from $687.3 billion in FY2008 to $681.3 billion in FY2013). 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. For example, Federal Reserve Board Chairman Benjamin Bernanke stated on March 2, 2011, that the fiscal problems of state and local governments have "had national implications, as their spending cuts and tax increases have been a headwind on the economic recovery." Also, if states reduce their service levels there could be additional pressure for the federal government to provide those services. As funding from ARRA expires, there could be additional pressure for the federal government to provide additional federal assistance to states. This publication examines the current status of state fiscal conditions and the role of federal assistance in state budgets. It begins with a brief overview of state budgeting procedures and then provides budgetary data comparing state fiscal conditions in FY2008 to FY2011. The data indicate that (1) states reduced their general fund budgets from FY2008 to FY2011, but, because they received increased federal funding, increased their total amount of spending; (2) the share of total state expenditures held by the states' four operating expenditures budgets (general fund, federal funds, other state funds, and bonds) shifted from FY2008 to FY2011, with an increased reliance on federal funds; and (3) states experienced varying levels of fiscal stress from FY2008 to FY2011. This publication concludes with an assessment of the consequences current levels of state fiscal stress may have for the 113th Congress.