US states face ‘lost decade’ of economic growth

States collectively face $250bn of budget gaps in the next two years and will have to defer investments such as pension and health care trust fund appropriations and infrastructure projects, according to a report published this week.

Saddled with $250 billion in budget gaps and revenue shortfalls that will persist into 2015, US states are facing a “lost decade” of economic growth during which they will struggle to fund deferred investments such as pension and health care trust fund appropriations and infrastructure projects, according to a report published this week.

The biannual report, “The Fiscal Survey of States”, predicts that states collectively face a $250 billion shortfall in their revenues and outlays between the 2009 and 2011 fiscal years, based on preliminary forecasts by the National Association of State Budget Officers and the National Governors Association.

“These are the worst numbers we’ve ever seen in the decades of putting together this report,” said Scott Pattison, executive director of National Association of State Budget Officers.

The recession drastically reduced states' tax revenues, which will remain depressed throughout fiscal year 2010 and likely into fiscal years 2011 and 2012, according to an analysis by the governors’ association. A true recovery won’t begin until 2014 or 2015, the two organisations said.

That’s when per capita real revenues for states will reach their 2007 levels, according to the Nelson Rockefeller Institute of Government. Similarly, Mark Zandi, an economist at Economy.com, also estimates the unemployment rate, currently at 10.2 percent, won’t reach its pre-recession lows of 5.5 percent until about 2014.

Until then, states are likely to defer important investments such as payments into retiree pension and health care trust funds as well as deferred maintenance, technology and infrastructure investments. All of these needs will have been postponed during the 2009 to 2011 period and will have to be made up toward the end of the decade.

In response to these fiscal difficulties, many states have enacted enabling legislation for public-private partnerships (PPPs) to help them meet their infrastructure needs. Earlier this year, the National Conference of State Legislatures estimated that 17 states have enabling legislation for PPPs moving through their legislatures. California, Arizona, Georgia and Massachusetts are among the states that have enacted such legislation this year.

States are also slashing expenditures and raising taxes. The report says that 42 states cut their enacted fiscal 2009 budgets by $31.2 billion and 33 states cut their fiscal 2010 budgets by $53.5 billion. And states enacted $23.8 billion of tax and fee increases in fiscal 2009 and additional increases in other revenue measures of $7.7 billion for fiscal 2010.

Thanks in part to these measures, states closed $72.7 billion in budget gaps in fiscal 2009 and $113.1 billion before the enactment of their fiscal 2010 budgets. But $14.5 billion in budget gaps remains for fiscal 2010 and at least $21.9 billion in gaps for fiscal 2011, according to the report.

“With states having entered the recession in 2008, revenue shortfalls persisting into 2014 and a need to backfill deferred investments into core state functions, it will take nearly a decade to emerge from the current recession,” the Governors Association concludes.