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States' Fiscal Condition Still Dismal, New Report Finds

State finances remain as bad as they have been in decades, and the fiscal picture isn't likely to clear up anytime soon, according to a report released this morning by the National Governors Association and the National Association of State Budget Officers.

"Fiscal 2010 presented the most difficult challenges for states' financial management since the Great Depression, and fiscal 2011 is expected to present states with similar challenges," the report says. "The severe national recession that most likely ended in the second half of calendar year 2009 has drastically reduced tax revenues from every revenue source."

And fiscal 2011 isn't looking much brighter, the groups say: A majority of states are contemplating cutting K-12 education next year as they brace for overall spending reductions for what could be the third year in a row.

State general fund spending declined an unprecedented two years in a row, in both fiscal years 2009 and 2010, the report found. It estimates that fiscal 2010 general fund expenditures will be $612.9 billion among all the states, down from $657.9 billion in the previous fiscal year—an 8 percent decline. And in their budget requests, 13 governors proposed spending less in fiscal 2011 than in fiscal 2010.

Overall, 44 states estimate that they will be spending less from their general funds in fiscal 2010 than they did in fiscal 2008, the last year before the recession struck.

Not surprisingly, the reduction in general fund spending was linked to a major drop in revenue, including sales, personal income, and corporate tax collections. The report estimates that those revenue sources dropped 11.8 percent from fiscal year 2008 to fiscal year 2010. (The report did not give comparisons for property taxes, which generally are local and are an important source of revenue for education.)

Mid-year budget cuts, typically considered a fiscal option of last resort, were widespread in fiscal 2010. Forty states made mid-year cuts totaling $22 billion. That's a lot even compared to the previous economic downturn in fiscal 2003, when 37 states made $12 billion in mid-year reductions.

K-12 education was a prime target for reductions. Thirty-four states cut spending on elementary and secondary education in fiscal year 2010, while 36 states made cuts to higher education.

Next fiscal year isn't looking good either. Thirty-one states have proposed cutting K-12 in fiscal year 2011. And 31 states have also proposed cutting higher education.

The stimulus helped make a bad situation somewhat more tenable, according to the report. Thanks to the stimulus, the federal share of state spending jumped to 30 percent in fiscal 2009 from 26.3 percent in fiscal 2008. But the stimulus only covered fiscal years 2009 and 2010. And states are likely to be in even worse shape without the federal assistance, the report concludes.

UPDATE: Governors and state lawmakers have been trying to protect K-12 education and health care, but that just might not be possible anymore, according to Scott Pattison, the executive director of NASBO.

States "disproportionately cut a lot of areas in state government while attempting to keep health care and education [from facing severe reductions]," Pattison told reporters at a press conference this morning to discuss the findings. "I'm not sure if every state can continue to do that."

Raymond C. Scheppach, the executive director of NGA, said the organization is hoping Congress will provide an additional $23 billion in Medicaid funds, which eat up a large portion of state budgets. That legislation must win approval from the U.S. Senate, he said.

But NGA isn't pushing for a separate $23 billion measure to stave off education layoffs championed by Sen. Tom Harkin, D-Iowa, the chairman of the Senate subcommittee that oversees education spending, and Rep. David Obey, D-Wis., the chairman of the House Appropriations Committee. Scheppach said some governors are concerned about the impact of the legislation on the deficit.

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