Dollars & Sense: State Budget Blues

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State Budget Blues
Looking for Funds in All the Wrong Places

By Marianne Hill



California's fiscal woes may have grabbed the national headlines, but states across the nation are slashing budgets to close gaps that are averaging a jaw-dropping 24% this year. Even before the economy nose-dived in late 2008, the Government Accountability Office (GAO) was warning states to expect growing revenue shortfalls over the coming decade. The recession and the staggering increase in the federal debt have worsened the GAO’s predictions.

The GAO now estimates that, if programs are maintained at current levels, state and local revenues will fall short by an average of 7.6% annually over the coming decade.

To close the yawning gaps in their budgets, states are currently relying on stimulus funds and budget cuts. But fewer federal funds will be there to help as the country begins to pay down the huge national debt. Experts anticipate that federal dollars going to state programs will be scaled back, with funding levels increasing only in targeted areas such as health care and energy. So shortfalls in state budgets will continue for years to come unless states either enact more cuts or update their antiquated tax systems.

In fact, it is past time to overhaul current tax systems. Neither the federal government nor state and local governments are adequately capturing revenue from the high-income, high-growth segments of the economy. At the same time, lower- and middle-income families are unfairly burdened.

Trends in expenditures account for part of the problem. State and local spending on health care for Medicaid, employees, and retirees is projected to significantly outpace revenues. Federal grants-in-aid, which finance about 20% of state and local budget outlays, are dominated by grants to Medicaid. Half of federal grants-in-aid go to Medicaid and this proportion has been increasing with rising enrollment and the growing cost of health care. By 2012, 60% of grants-in-aid will be going to Medicaid, leaving fewer federal dollars for other programs. ..........(more)

The complete piece is at: http://www.dollarsandsense.org/archives/2009/1109hill.html