The budgetary situation of US states since 2007

State finances in the US have been steadily deteriorating since the beginning of the economic downturn in 2007. In its spring 2009 Fiscal Survey of the States, the National Association of State Budget Officers (NASBO 2009) reports that in 2009 so far, 42 states have been forced to reduce their enacted budgets by over $31.6 billion, in contrast to the thirteen that reduced their budgets in 2008 and three states that did so in 2007. It is worth noting that unemployment and government deficits typically lag behind economic indicators, and that even if the economy manages to show signs of recovery by the end of 2009, the state fiscal crisis is expected to last well into 2011. In order to meet their budgetary requirements states have had to resort to various combinations of cuts in services, tax measures and program cuts. The various combinations of tax increases and other types of measures taken to raise funds have varied greatly across states, as well as the categories of spending and programs that have been cut. The categories of spending that have been cut are across the board and include public health; programs for the disabled; K-12 education; post-secondary/higher education; and state workforce development programs (training and related activities).[9] Tax measures have been taken in the area of sales, corporate and income tax as well taxes on alcohol, tobacco, fuel and fees.[10]

There are two big concerns that arise from the current economic situation of the States; that their fiscal situation is looking less and less sustainable in both a short and long term perspective and that their balanced budget requirements and the general aversion to tax increases significantly limits their ability to enact anti-cyclical policies for growth. While many national and sub national governments around the world have been enacting economic stimulus packages[11] the U.S. states are constrained by their balanced budget rules and have been forced to make a compromise between economic recovery and their legal obligations.

While most governments would choose to cut taxes and increase spending to encourage economic growth, balanced budget obligations are having the effect of increasing the likelihood that states are resorting to pro-cyclical measures such as tax increases and spending cuts, both of which can contribute to a reduction in demand and thus only exacerbate the downturn. This situation has made some state governors put increased pressure on the federal government to provide some sort of aid package for the states.[12] But others feel that States should be required to balance their own budgets without federal aid and that fiscal sustainability should be the top priority. From this perspective it is careless and short-sighted to accept aid in the form of increased spending when the long term priority is a reduction in the size of government.

While the Bush administration was on the whole unsympathetic to state government pleas for financial assistance with budget shortfalls[13] Obama’s administration has responded with The American Recovery and Reinvestment Act of February 2009. While the projected budget state shortfalls for fiscal years 2009-2011 are estimated at about $250 billion dollars in total[14], the ARRAs flexible funds somewhat counter these, namely with $87 billion for Medicaid with the expansion of the Federal Medical Assistance Percentage as well as coverage and $48 billion in the new State stabilization fund for education and other critical (not defined precisely in the Act) government services, for a total of about $135 billion in counter-cyclical funds.[15] The ARRA funds therefore contribute to a (roughly) 50% reduction in the budget shortfalls, providing significant aid but certainly not a complete solution to the financial woes of the states. Further information about the Act is provided in the next section.

Date: 2016-04-22; view: 597