State & Local Government

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Fiscal 2008 marked a turning point for state finances with a significant increase in states seeing fiscal difficulties, in stark contrast to the preceding several years. As the economy has weakened, so has the state revenue and spending picture. The decline of the housing sector along with a weak manufacturing sector have combined to cause significant declines in revenue for a number of states.

Findings include:

• Thirteen states were forced to reduce enacted budgets in fiscal 2008. This is in stark contrast to the three states that had to reduce their enacted budgets in fiscal 2007.
• Eighteen states assume negative budget growth for fiscal 2009 governors’ recommended general fund budgets, while four states are estimating negative growth budgets for fiscal 2008.
• Medicaid spending from state funds is estimated to increase by 4.4 percent in governors’ recommended budgets for fiscal 2009; more than four times the rate of growth for the overall general fund. This increase in health care spending continues to place pressure on state budgets by exceeding overall spending.
• Six states are recommending increases to their fiscal 2009 cash assistance levels under the Temporary Assistance for Needy Families (TANF) program, ranging from 0.1 percent to 30 percent.

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Confronted with declining economic conditions driven by downturns in housing, consumer spending, and jobs and income, city finance officers report that the fiscal condition of the nation’s cities has weakened dramatically in 2008.

Among the findings of the National League of Cities’ latest annual survey of city finance officers are:

❋ Two in three city finance officers (64%) report that their cities are less able to meet fiscal needs in 2008 than in the previous year;

❋ Final tallies for 2007 reveal that city revenues, when accounting for inflationary factors, remained flat (growth of 0.1%), while spending increased by 3.0%;

❋ As finance officers look to the close of 2008, they predict that revenues and spending will decline in inflation-adjusted terms, with revenues decreasing by 4.3% and spending decreasing by 1.5%;

❋ Property tax revenues increased by 6.3% in 2007, but are predicted to decline by 3.6% by the close of 2008;

❋ Spending pressures stem from rising costs, such as energy and fuel prices, public safety and infrastructure needs, and employee-related costs for health care, pensions, and wages;

❋ To balance annual budgets and meet ongoing spending needs, many cities are increasing fees and charges for services; and,

❋ Ending balances, or “reserves,” remain at high levels and will provide a buffer against the current downturn.

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At least 39 states faced or are facing shortfalls in their budgets for this and/or next year. Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year — which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps have opened up in the budgets of at least 27 states plus the District of Columbia just three months after they struggled to close the largest budget shortfalls seen since the recession of 2001. And these problems are expected to continue into next year.