The state of the state and local government sector: Fiscal issues in the Seventh District

The National Governors’ Association has projected that state budgets will face an $80 billion deficit in fiscal year (FY) 2004. This would represent almost 18 percent of total state spending. This comes on the heels of a nearly $30 billion spending gap in FY2003. This degree of budget insolvency in the state sector is unique for two reasons. First, it follows a relatively mild national recession that, by historical standards, would not have been expected to send the states into such budget turmoil. Second, it has affected virtually every state, regardless of the type of revenue system they use to support state government functions. The persistent nature of these budget shortfalls has exhausted the usual budget adjustments that states make to pull themselves through tough times. Fund transfers, drawing down reserves, and one-shot revenue infusions were all used to balance state budgets in FY2002 in the hopes that stronger economic growth would restore fiscal health going forward.