Arkansas’ budget issues less severe than most states

Arkansas entered fiscal year 2010 in a lot better condition than surrounding states, yet back-to-back declines in revenue over the past two years could be a sign that tough times are still ahead.

According to the Center on Budget and Policy Priorities, a nonpartisan Washington, D.C.-based think tank, the worst recession since the 1930s has caused the steepest decline in state tax receipts on record. The think tank says every state save Vermont has some sort of balanced-budget law. That means the shortfalls for 2009 and 2010 and most of the shortfalls for 2011 have already been closed through a combination of spending cuts, withdrawals from reserves, revenue increases, and use of federal stimulus dollars.

“States’ fiscal problems will continue in the current fiscal year and likely beyond. Already 39 states have projected gaps that total $102 billion for the following year,” says a July 15 report from on the state budget crisis.

SIGNIFICANT DECLINES
Some of the best perspective on the economic health of state budgets comes from a “Fiscal Survey of States: June 2010” report prepared by the National Governors Association and the National Association of State Budget Officers. The figures are compiled from detailed surveys completed by the governors’ and budget officers in all 50 states.

The report’s executive summary notes: “As state revenue collections historically lag behind any national economic recovery, state revenues will remain sluggish throughout fiscal years 2011 and 2012. State general fund spending has been so negatively affected by this recession that both fiscal 2009 and fiscal 2010 saw declines in state spending. This two year decline is unprecedented and is only the second time that state general fund spending has declined in the history of the Fiscal Survey.”

According to the report, the reduction in general fund spending is the result of “significant declines” in sales, personal income, and corporate income tax collections, which make up approximately 80% of general fund revenue. States say the tax revenues in 2010 will be $477.4 billion compared to $541.4 billion in fiscal 2008, a decline of 11.8%. States have also experienced the decline of tens of billions of dollars in fees and other taxes, the report notes.

Other findings in the report include:
• 40 states decreased their general fund expenditures in fiscal 2010 compared to fiscal 2009. Thirteen states recommended lower general fund expenditures compared to fiscal 2010. In total, 44 states estimate they will have lower general fund expenditures in fiscal 2010 compared to fiscal 2008.

• In fiscal 2011, 39 states recommended lower spending than in fiscal 2008. (Fiscal 2008 serves as a baseline as it the last fiscal year on record in which states were not significantly affected by the national recession.)

• Fiscal 2010 general fund expenditures among all states are currently estimated to be $612.9 billion compared to $657.9 billion in fiscal 2009, a 6.8% decline.

• Governors’ recommended budgets for fiscal 2011 forecast a 3.6% increase to $635.3 billion in general fund expenditures. In contrast, general fund spending in fiscal 2008 was $687.3 billion indicating that general fund spending will be $74.4 billion less in fiscal 2010 and $52 billion less in fiscal 2011 compared to fiscal 2008.

• Nineteen states addressed their budget gap by making use of their rainy day fund.

• Medicaid spending from state funds is estimated to decline by 2.7% in fiscal 2010, while federal funds are estimated to increase by 17.2%. However, the loss of Recovery Act funds is projected to result in Medicaid spending from state funds to increase by 7% in governors’ recommended budgets for fiscal 2011, while federal funds are expected to decrease by 1.7%.

THE ARKANSAS SITUATION
In Arkansas, there was $4.3 billion net available revenues heading into fiscal year beginning July 1, according to the State Department of Finance and Administration. That amount is $111.5 million, or 2.5% below last year.

Overall, gross tax collections totaled $5.43 billion in the fiscal year ended June 30, representing a decrease of $130.7 million, or down 2.4% compared to the previous year.

“The decline in Net Available funds in FY 2010 and FY 2009 marks an unusual period of back-to-back annual declines in revenue,” state budget officials noted in the fiscal 2010 summary. “Prior recessions were limited to single year impacts and with few resulting in zero or negative annual change.”

The state has a liability in its unemployment insurance fund where it has borrowed more than $300 million from the federal government to shore up the jobless worker account. How that money is repaid — through tax hikes on businesses, forgiveness from the feds or a combination of both — is yet to be settled. It is likely to be a major budget issue in January's legislative session.

TROUBLED NEIGHBORS
Despite Arkansas' negative numbers, the Natural State is one of only four states in the U.S. to enter fiscal 2011 without an official deficit. Sister states like Louisiana, Oklahoma, Tennessee and Mississippi — where precipitous revenue shortfalls have panicky lawmakers raiding “rainy day” funds, cutting state jobs and program, and proposing various tax raising schemes — all enter fiscal 2011 with record or near-record budget shortfalls.

For example, Oklahoma ended fiscal year 2010 with the worst revenue shortfall in the state’s history.

“The effects of the global recession were felt strongly in Oklahoma during the fiscal year,” State Treasurer Scott Meacham said in a July 13 new release. “A drop of $945 million or 17 percent in collections from the prior year illustrates the intensity of the historical downturn Oklahoma’s economy experienced.”

Mississippi Gov. Haley Barbour was forced to order spending cuts five times in 2010 in order to comply with the state’s constitutional mandate to balance the budget.

According to Sunshine Review, a non-profit Web-based organization dedicated to state and local government transparency, Mississippi faced a $363 million deficit for FY 2009, $480 million deficit for FY 2010, with an estimated shortfall of $544 million for FY 2011. For the FY2011 budget, legislators were in session from early January until late March 2010, but took a break, hoping Congress would approve $187 million in additional federal stimulus money for Mississippi's state spending plan.

With the money still on hold, lawmakers announced April 16 that they reached a $5.5 billion budget deal for the fiscal year that begins July 1, and most state programs will take cuts because money is tight.

However, with the BP oil spill disaster wreaking havoc on the state’s tourism and lucrative oil and gas industries, Louisiana's budget shortfall is among the worst in the nation.

"If you think this year was bad in the Legislature, wait 'til next year," Sen. Robert "Bob" Kostelka, R-Monroe, recently told the Monroe News-Star. "The so-called 'cliff' we've been waiting for next year looks like Mount Everest."

Louisiana ended fiscal 2010 with a $580 million budget shortfall. In late June, lawmakers passed a $26 billion budget for FY2011, which began on July 1. The new budget cuts nearly 3,000 full-time state positions and slices spending in nearly every state agency. Altogether, Louisiana has cut more than 6,300 full-time payroll positions since 2008.

The other surrounding states, Missouri, Texas and Tennessee, also project budget deficits well into the future. Missouri Gov. Jay Nixon's administration is projecting a $600 million shortfall for Missouri's 2012 budget. The shortfall is due primarily to the phase-out of $860 million of federal stimulus funds that are being used in the current budget.

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In Tennessee, Gov. Phil Bredesen recently signed the $30 billion budget for Fiscal Year 2011 into law on June 25 with overwhelming approval from both the state’s Senate and House of Representatives. The Volunteer State faces a budget shortfall of nearly $1 billion. The FY 2010 budget used state savings to avoid laying off 700 state workers, but won't have that option for the next fiscal year beginning July 1, 2010.

Texas faces a budget deficit of up to $18 billion heading into fiscal 2011. In June, Gov. Rick Perry signed a $182 billion 2-year budget with a projected $9 billion Rainy Day Fund. The FY 2010-2011 biennium budget of $182.3 billion spends $1.6 billion less in general revenue than the previous biennium.

2011 POSSIBILITIES
Nationwide, some think tank and economists have forecasted state budget shortfalls in all 50 states to top $200 billion. If the economy worsens, those estimates could end up being far too rosy.

If conditions do worsen, expect deeper cuts in state employment and state aid to communities. In fiscal 2010, 36 states used targeted cuts and 28 states implemented across the board cuts, according to the “Fiscal Survey of States” report.

The report also notes that 26 states had layoffs and 22 states instituted furlough programs. To eliminate fiscal 2011 budget gaps, governors in 35 states proposed targeted cuts, and 19 governors proposed across the board cuts. Twenty states proposed to reduce aid to cities, and 15 governors recommended using their states’ rainy day funds.

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