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US States Face More Financial Stress: Official Report

Legislatures around the country may have to make more spending cuts over the next couple of years because of dwindling help from the federal government and a slow recovery in tax revenue, according to a new report.

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States will spend about $43 billion in economic stimulus funds during the current fiscal year, which ends June 30. After that, they'll probably have to get by with less federal funding.

The report from the National Governors Association and the National Association of State Budget Officers warned of "extremely tight fiscal conditions for states" as federal support winds down.

Critics of the economic stimulus legislation note that it failed to prevent a large jump in the unemployment rate.

But the report credited the money with helping states avoid "draconian cuts" to Medicaid, education and other programs.

Before Congress passed the stimulus, states relied on the federal government to cover a little more than a quarter of their spending.

That share has increased to nearly 35 percent, said the report based on a survey of state budget officials.

Spending by states declined in fiscal years 2009 and 2010, the first time in the survey's history that states reduced spending in consecutive years. That streak probably won't continue this fiscal year, which began July 1.

States have enacted budgets that on average called for a 5.3 percent increase in spending, even if most now expect to spend less than they did before the economy went into recession.

The vast majority of states must maintain balanced budgets. Faced with a sharp decline in tax revenue, most relied on program cuts and tax increases in recent years. The cuts frequently took place in education.

Of the states that made midyear budget cuts in 2010, 35 reduced spending on elementary and secondary education, and 32 lowered spending on higher education.

Transportation faced the fewest cuts, the report said. Not all state budget offices have completed their forecasts. But at least 23 states anticipate budget deficits totaling $40.5 billion in 2012.

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