Warning for TBED: State Budget Problems Go Beyond Current Economy

During the past two months, five reports have highlighted grim news for state budgets in fiscal year 2008, FY 2009 and beyond, brought on by declining revenues, the crisis in the housing market, increased oil prices, a potential national recession, and structure issues with state finances.
 
In early December 2007, the National Governors Association and the National Association of State Budget Officers released The Fiscal Survey of States, which indicated that state spending is expected to grow only 4.7 percent this fiscal year and budget shortfalls are developing as rising healthcare costs put pressure on revenue and spending. In mid-December, the National Conference of State Legislatures found that states' revenue growth is slowing and deficits could reach at least $23 billion. The January State Revenue Report from the Nelson A. Rockefeller Institute of Government showed 2007 third-quarter tax revenues were down 0.6 percent over the same period last year, after adjusting for inflation, prompting governors to make mid-year budget adjustments for FY 2008.

Fourth, a Center on Budget and Policy Priorities revised report released Jan. 28 found that more than half of the states are anticipating budget problems and at least 25 states face budget shortfalls in FY 2009. Of the 25 states, 19 are expected to have shortfalls totaling at least $32 billion for FY 2009, including Alabama, Arizona, California, Florida, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Rhode Island, South Carolina, Virginia and Wisconsin. These states' shortfalls average 8 percent to 8.7 percent of their general fund budgets. Another three states expect budget problems in FY 2010 and beyond, including Connecticut, Missouri and Texas, the report indicates. Actions states are likely to take to address budget shortfalls, according to the analysis, include cuts in services such as health and education, tax increases, and cuts in local services or increases in local taxes.
 
Finally and perhaps most disconcerting is the Jan. 22 report from the General Accounting Office (GAO). While the title alone, Growing Fiscal Challenges Will Emerge during the Next 10 Years, is intended to create alarm, the contents are more so. The preface, signed by Comptroller General of the U.S. David Walker, hints of Walker’s growing exasperation and sense of crisis: “Continuing on this unsustainable path will gradually erode, and ultimately damage, our economy, our standard of living, and potentially our domestic tranquility and national security.”
 
The GAO’s model foretells of several severe pressures on state revenues and budgets creating fiscal chaos within the next 5-10 years. Many issues some states have been experiencing for a growing number of years already, including rapidly rising medicare costs, declining revenues based on archaic tax structures, and delayed maintenance for basic infrastructure needs.
 
Other problems are perhaps more subtle and may not have percolated into budget talks on the floors of state assemblies:

• Interest rates on long-term debt loads as state and local credit ratings fall due to budget imbalances and depleted rainy day reserves;
• Pension fund intakes have not kept pace with size and age of state employment payrolls or rising health care costs, particularly as pensioners live longer;
• Burgeoning health care costs for current state and local employees and their families; and,
• Structural problems with the federal budget are being passed on to states via smaller transfers and more underfunded federal mandates on state and local budgets.

What it means for TBED
The GAO points out the U.S. cannot simply grow its way out of the problem economically. "Substantial policy changes would be needed to prevent fiscal decline in the state and local government sectors,” the GAO notes.
 
Troubling, too, for the tech-based economic development, higher education and even K-12 educational communities is that these pressures on state and local budgets are likely to result in significant counterpressures in those areas not directly linked to the problems. That means states will have less funding available for discretionary activities such as TBED, higher education and some K-12 activities. Additionally, there will be increased calls for accountability and impact performance measures.
 
It may make sense for TBED programs to be looking now at strengthening their performance reporting, building constituent support, and broadening revenue streams. Some solutions may require alternative structures (external to state government, for instance) to permit the organizations to accept these revenues, hold equity positions or provide financing, for example. Other approaches could include establishment of endowments through bonds, foundation contributions and one-time appropriations.
 
Currently state, university and local TBED efforts are caught in battles for shares of the decreasing budgets for FY 2009. Evidence is mounting, however, on the need to focus increasingly on long-term financial security to sustain efforts to compete in innovation-based economies.
 
This will be a central topic of discussion at SSTI’s annual conference, Oct 14-16, 2008, in Cleveland. Please reserve space on your calendars now to join us. Registration, which had to be closed prior to the event last year, will again be limited. More information is available at http://www.ssti.org/conference08.htm.

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