State budget outlook: With no more help from Washington, the worst is still yet to come

Last week I attended the annual State Fiscal Policy conference hosted by the Center for Budget and Policy Priorities, the top non-governmental organization analyzing state fiscal policy across the nation. The message we heard was clear and grim: As rough as the past two years of  revenue shortfalls and budget cuts have been here in Oklahoma and across the states, the upcoming budget year, FY ’12, is going to be even worse.

This chart created by the Center presents the story succinctly:

What we see is that over the past three years, federal assistance to the states provided through the 2009 stimulus bill, or Recovery Act, made up for over 50 percent of total state shortfalls.  The states were left to address the remaining shortfall through a combination of reserve funds, budget cuts, and revenue increases. In FY ’12, the total shortfall is projected to narrow from $160 billion to $140 billion as state revenues recover. However, with most Recovery Act funds already allocated, the states’ remaining budget gap after federal assistance is projected to increase to a peak  level of $134 billion.

The national pattern is likely to hold in Oklahoma. As we’ve discussed in this briefing memo and this fact sheet, Oklahoma’s General Revenue collections fell by over 20 percent during the recession. The state used almost $1.4 billion in Recovery Act funds, along with $600 million from the Rainy Day Fund, and other non-recurring revenues, to mitigate the severity of budget shortfalls and cuts over the past two budget years and avoid the most extreme doomsday scenarios. Now, even though revenues are beginning to recover, this growth is modest: FY ’11 year-to-date collections remain 24.0 percent below the pre-downturn levels of FY ’09. Although we do not yet have official projections for FY ’12, it appears certain that revenue growth will be nowhere near adequate to make up for the loss of Recovery Act and Rainy Day Fund dollars (OK Policy is preparing forecasts we will release in early December and the initial official state projection will be certified in late December).  In addition, next year’s revenues are likely be impacted by deferred cuts to the top income tax rate that are expected to be triggered in 2012.

By all accounts, the chance of another round of state assistance coming from Washington during the next Congress is essentially nil. In fact, while Congress until now has helped ease the severity of state deficits, there is a real chance that Congressional actions being considered over the coming months will shift more costs to states and exacerbate states’ budget shortfalls. Some proposals that could have a harmful fiscal impact for states include:

  • The Obama Administration is proposing a new tax break to encourage investment that would allow businesses to immediately deduct from their gross income the entire cost of capital investments in machinery and equipment — a practice known as “expensing”. The Center on Budget notes that “because of linkages between the federal and state tax codes, this proposal would cost state governments significant amounts of revenue.” For Oklahoma, the lost revenue is projected to be $187 million over the next two fiscal years. States could, however, decouple from this federal provision to avoid taking this big revenue hit.
  • House Republican leaders have proposed tackling the deficit by cutting non-security discretionary spending by more than 20 percent in fiscal year 2011. The Center calculates that this proposal could reduce federal funding for programs operated by state and local governments by $32 billion, which for Oklahoma would translate to a loss of $382 million in funding for state and local programs.
  • The potential end of the federal program providing extended Unemployment Insurance (UI) benefits to the long-term unemployed, which is now set to expire November 30th, would also have an impact on state budgets. Without UI benefits, more unemployed workers and their families would turn to the state-funded Temporary Assistance for Needy Families (TANF) program and other sources of state support and assistance.

Hopefully, state governments and advocates will be able to avert Congress from making the states’ budget situations worse. But without any real hope of another lifeline from Washington, the prospects for next year’s budget have never looked more daunting.


Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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