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Looming Revenue Shortfalls Latest Challenge for Many States

December 12, 2012

Amid the economic uncertainty surrounding fiscal cliff negotiations, and what it means for states, some governors are erring on the side of caution when it comes to funding recommendations for the upcoming year. At the same time, several state budget officers are projecting significant revenue shortfalls in the current fiscal year or biennium as a result of lower than expected tax collections.

States could lose an estimated $7.5 billion in federal funding if the automatic spending cuts take effect for 161 grant programs, according to a recent analysis by the Associated Press. States with heavy defense spending, such as California, Texas and Virginia could also take a hit with $33.6 billion in cuts slated for military and defense contractors.

In the coming months, governors from across the nation will present their State of the State addresses — a key time to unveil new and expanded TBED programs. But for some states, shoring up budgets and preparing for worst case scenarios is the top priority.

Following is a synopsis of recent news announcing budget deficits throughout the states and possible short- and long-term solutions from state officials.

Gov. Dan Malloy last week released a roadmap to deficit mitigation plan ahead of budget deficit talks that began earlier this week with lawmakers. Connecticut Comptroller Kevin Lembo estimates the state's shortfall is $415 million for FY13. Projected state spending above budgeted levels and the slow pace of the national economic recovery are impeding the state's ability to bring the budget into balance, Lembo said in a press release. Gov. Malloy cited lack of tax revenue and increased Medicaid expenditures related to long-term unemployment as major contributors.

The governor's roadmap includes $220 million in cuts on top of $170.4 million in rescissions made in late November. The proposed cuts include $2.6 million for the Department of Economic and Community Development (on top of to $1 million in rescissions) and reducing funding for Regional Performance Incentive Grants by $8.5 million. The roadmap also proposes converting the stem cell program to a bond program for a savings of $10 million.

Blaming the fiscal cliff uncertainty as a direct cause of the state's budget challenges, Gov. Deval Patrick outlined a plan to close a $540 million gap in the FY13 budget. This includes reducing executive branch spending by $225 million and transferring $200 million from the Rainy Day Fund to the General Fund. Lawmakers, who have ended formal sessions for the year, must approve the spending cuts. In October, MassBenchmarks released a sobering report on the Massachusetts economy, finding that the state's growth was no longer outpacing that of the nation, and predicting a slow outlook for the rest of the year. However, the report notes that some knowledge-based and technology sectors have continued to do well, with increased employment in computer systems, consulting, R&D, software, and durable manufacturing.

While an improving economy will allow the state to end its current biennium with a budget balance of $1.3 billion, or 3.2 percent higher than expected, that funding is slated to repay school aid, leaving a $1.1 billion shortfall forecast for the 2014-15 biennium. The shortfall, however, is only slightly larger than anticipated by lawmakers when they met in August for a special session. The Minnesota Management & Budget Office reports the projected shortfall has grown by $16 million since then. The shortfall remains largely because non-tax revenues and transfers are expected to be well below amounts projected in the current biennium and debt services costs significantly higher.

A report by the budget office points to short-term uncertainty that continues to plague the recovery as a reason why economists do not expect a booming economy in 2013. Gov. Mark Dayton released a statement on the budget forecast warning of inaccurate comparisons between this biennium and the last in terms of both revenue and spending. Gov. Dayton will present his budget recommendations next month.

Read the November 2012 forecast: http://www.mmb.state.mn.us/forecast-documents-nov12.

A four-year outlook by the Washington State Economic and Revenue Forecast Council points to long-term structural issues in the state's budget, including a $900 million shortfall for the 2013-15 biennium, increasing to nearly $1.1 billion in the following two years. Steve Lerch, executive director of the council, said in a press release that revenue collections are on track, but personal income is falling off slightly compared to a previous forecast. Outgoing Gov. Chris Gregoire will propose a budget for the new biennium by Dec. 20, although Gov.-elect Jay Inslee is expected to make revisions to the budget when he takes office in January. Under a new law, beginning with the 2013-15 budget, lawmakers are required to adopt an operating budget that balances projected revenue and expenditures over two full biennia, or through 2015-17. Gov. Gregoire noted that the state's structural budget shortfall has been prolonged in recent years by an over-reliance on one-time fixes, including fund shifts and temporary cuts or revenue increases.

Governors in Kansas and Virginia also have warned of dips in revenues that likely will lead to spending cuts. Kansas legislative fiscal analysts have predicted a $3.7 billion revenue shortfall over five years resulting from the income tax cuts signed into law earlier this year, reports The Kansas City Star. Citing the prospect of deep federal budget cuts, Virginia Gov. Bob McDonnell ordered state departments to prepare for 4 percent cuts, or about $132 million over the next 18 months.

Connecticut, Kansas, Massachusetts, Minnesota, Virginia, Washingtonstate budget