State economies have partially recovered from the depths of 2009 and early 2010, but 17 states still project deficits. Moreover, there are no rainy day funds or untapped revenue sources, and some “temporary” tax hikes are set to expire. California is $13 billion in the hole but that is a huge improvement compared to the $40 billion hole previously.

Yahoo!Finance reports State revenue rises, but not enough to offset cuts

Twenty-nine states are spending less from their general funds today than they did before the recession, according to a recent joint survey from the National Governors Association and the National Association of State Budget Officers.

More than 30 states have raised taxes since the recession began, but some of those increases were temporary and are expiring soon, as in Arizona. With the economy slowly reviving and unemployment rates dipping, many governors and lawmakers say they don’t want to jeopardize the recovery by raising taxes again.

But tax revenue is not expected to grow enough to make up for the impact of four years of dismal economic times. Rainy-day funds, internal transfers and other one-time sources have largely been tapped, so governors and lawmakers must look for new places to cut spending.

Changes to public employee retirement benefits and sweeping reforms to health care programs such as Medicaid are among the most likely targets.

At least 17 states project budget gaps for the next fiscal year, while a handful need to balance budgets in the remaining six months of the current budget year. The revenue of all 50 states combined remains $21 billion below 2008 levels, according to the National Governors Association-NASBO report.

Budget gaps in states projecting shortfalls in the 2012-13 fiscal year are estimated to total $40 billion. By comparison, California alone closed a deficit of $42 billion in 2009, during the worst of recession.

Democratic Gov. Jerry Brown and state lawmakers have fewer options to close the $13 billion shortfall that is projected over the next 18 months.

In December, Brown ordered $1 billion in midyear spending reductions to public schools, universities and social services because tax revenue did not meet projections. The state has given school districts the option of slicing another seven days from the current school year, now 175 days long. That already is five days shorter than before the recession.

Low-income seniors and the disabled will get less in-home care when the reductions start in January. School advocates warn that an estimated 1 million students will have trouble getting to class with a drop in home-to-school transportation funding.

“The cut to transportation is absolutely devastating,” said Steve Henderson, a lobbyist for the California School Employees Association. “What that means is a lot of low-income and rural kids will not have the ability to get to school.”

Brown has proposed a 2012 ballot initiative to raise $7 billion annually through 2016 by boosting income taxes on individuals making $250,000 or more a year and increasing the state sales tax by a half-cent. He also has submitted a plan to the Legislature to revamp public employee pensions.

Washington state is considering similar cuts to cope with its shortfall, including shortening its school year, eliminating medical programs for 55,000 low-income residents and letting some low- and moderate-risk offenders out of prison early.

Missouri is reducing funding for elementary and secondary education to close a mid-year budget deficit tied to tornado recovery. North Carolina Gov. Beverly Perdue, a Democrat, is warning of thousands of teacher layoffs next fall because federal aid to local school districts is running out.

Moving Targets and the Slowing Global Economy

Things look better than the depths of the recession, but there are two major problems

  1. Moving Targets
  2. Slowing Global Economy

Unlike 2011, the US will not be immune from slowing global economy, especially in the Eurozone and China. Europe will enter a massive recession and there will be spillover effects. I expect an outright recession in the US, but more certainly a profit recession.

In turn, this will mean states will face moving targets and revenues will not meet expectations, just as is happening in Europe right now.

Worse yet, there are no rainy day funds anywhere, and many feel states have already cut services to the bone. This time around, don’t expect much help from Congress. It’s simply not coming.

Finally, with the stock market flat in 2011, it’s safe to assume state pension plans are deeper in the hole than a year ago. Most pension plan assumptions have expectations of 8% or 8.5% growth. It did not happen in 2011, and I expect 2012 to be much worse.

Mike “Mish” Shedlock
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