Fiscal Year 2011 Food Fights

By Dave Anderson:

At the start of this fiscal year, Pennsylvania went without a budget for more than three months.  There was roughly a 10% gap between regular, recurring revenues and desired spending levels.  This gap could have been larger except for the infusion of significant federal stimulus dollars.  The overt fight was how to close that 10% gap; should the state raise recurring taxes, use one-time reserves, or reduce spending.  The state did a bit of all three. 

However, as I noted in September when the budget passed, there was another fight going on.  That fight is about next summer:

The contour of this fight has always been a contest to see who will be blamed for the FY-2011 budget.  Early projections on income taxes and sales tax revenues are not good.  As the federal stimulus dollars ease out of the next budget, the deficit looks to be significant.  This is why the Democrats as a whole wanted to save one time revenue sources (Rainy Day fund, surplus in the mal-practice premium subsidy fund) for later on while enacting broad based taxes.  No one wants to vote on tax increases three months before the general election in a tough economy. 

This was predictable because everyone knew that the economy would not recover to previous levels, much less resume growth at normal recovery rates by the start of next summer.  The National Conference on State Legislatures had projected in October significant declines in state tax revenues for most states:

Throughout the recession state revenue collections have consistently underperformed expectations. The decline has been steep and unrelenting. Even pessimistic forecasts have not been met, producing cavernous holes in state budgets. Despite the painful decline, states are anxious to hit bottom so that a revenue rebound can begin. 

 

Unfortunately, the steep revenue falloff in FY 2009 will not be the bottom for many states. More than half expect a further decline in FY 2010. On top of that, a growing number of states already have missed their revenue targets in the early months of the new fiscal year, producing another round of budget gaps.

Current projections are for states to face at least a 1% of GDP gap between their already austere FY2010 budget levels and projected income for FY2011.  Most of those states have a summer fiscal year start date which means the budget fight will take place just as the voting public begins to lock into their political mode over the summer.  The basic contour of the argument will be to use budget cuts or tax increases to close the gaps as most states have already tapped out their reserves and it is unlikely that there will be a significant second round of stimulus or increased Federal Medicaid reimbursement rates this summer. 

I expect at least 10 states to go at least three months without a complete FY-2011 budget after their respective fiscal years begin.