State, local services hit as revenues fall

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By David M. Dickson

No sooner had state lawmakers around the country gone home after spending months plugging ever-widening budget gaps for fiscal 2010 than signs of new trouble began to emerge.

After finally closing the books on budgets that began July 1, many legislatures must now call members back to square spending with revenues that can't seem to keep up.

"The unprecedented state fiscal problems brought on by the worst decline in tax receipts in decades show no sign of letting up," said Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities (CBPP), a liberal-leaning think tank.

"The current recession is more severe — deeper and longer — than the last one, and state fiscal problems have proven to be worse and are likely to remain so," she said.

Gov. Tim Kaine, Virginia Democrat, recently reported a $1.5 billion revenue shortfall, which he said will have to be bridged by budget cuts and possible layoffs of state employees in fiscal 2010. "I can't say anything is off the table," Mr. Kaine said Aug. 19 after addressing legislative leaders on the state's financial situation.

Maryland Gov. Martin O'Malley outlined $454 million in budget cuts on Tuesday to erase a deficit in the budget year that began July 1. The cuts would include laying off more than 200 state workers, imposing furloughs on other state employees, reducing state aid to local governments by $211 million and cutting higher-education spending by $36 million.

Fiscal 2010 and 2011 look especially bleak because state revenue streams, which were terrible last year, are now collapsing at unprecedented rates. Even if the national economy begins growing during the second half of this year, most economists expect today's unemployment rate of 9.4 percent to approach or exceed 10 percent and remain near that level for most of 2010. That will raise demand for state-provided social services, such as Medicaid, and reduce revenues from sales and income taxes.

According to the National Conference on State Legislatures, states had to eliminate nearly $75 billion in deficits during fiscal 2009 while simultaneously confronting almost $150 billion in additional deficits projected for fiscal 2010. Unlike the federal government, nearly all states must balance their budgets on a yearly basis.

For fiscal 2010, 48 states faced budget shortfalls that totaled $165 billion, or 24 percent of projected spending, estimates the CBPP. Only North Dakota and Montana escaped the task of eliminating deficits.

Most states addressed these shortfalls through a combination of budget cuts, tax increases, rainy-day fund drawdowns and proceeds from the federal government's $787 billion economic stimulus package.