Don't hold your breath: the recession may be over, but states will continue to face high unemployment and lower revenues well into the next decade.

• Author: Smith, Edward

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The good news is that state economic forecasts over the past two years have been consistent.

The bad news is they've been consistently bad.

That pattern persists in the new year as lawmakers take stock of what happened in FY 2010 and look at how FY 2011 budgets are shaping up. Even as the stock market continues to rise and the 2009 third quarter gross domestic product showed growth, states are facing slow revenue recovery, persistent high unemployment and an increased demand for services.

"I think we've hit bottom, but I think we're going to spend a fair amount of time bouncing along the bottom. This will not be over quickly," says David Wyss, chief economist for Standard & Poor's. "It's better than no recovery. But just because you're recovering doesn't mean revenues will turn on a dime."

Tax revenues lag the economy--income taxes and capital gains taxes are paid at the end of the year, and people out of work or suffering losses in the market pay fewer taxes. Consumer spending, which accounts for two-thirds of the U.S. economy, is expected to remain weak, especially as high unemployment persists.

"All that suggests tax revenues are going to get worse," Wyss says.

That perspective is backed up by the latest "State Budget Update" from the National Conference of State Legislatures, released in December. It found 39 states and Puerto Rico expect general fund revenues in FY 2010 to be lower than FY 2009 collections.

"State revenues performed so poorly in FY 2009 that some officials thought the hemorrhage had ended. That was wishful thinking," writes Corina Eckl, NCSL's fiscal director. "Instead, general fund revenues in FY 2010 are expected to recede even further, falling below last year's collections in the vast majority of states--depressing news indeed."

A key driver of recovery in the states is employment and wages, says Donald J. Boyd, a senior fellow at the Nelson A. Rockefeller Institute of Government, who tracks state budgets.

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"If you look at the last recession from the point at which the GDP began to recover, it was 17 quarters before employment wages got back to where they were when it started," he says. "Consumption is typically highly related to people's incomes. You expect consumer spending to take a little time to recover. There are reasons to believe it will take a long time."

BATTERED BUDGETS

The sagging revenues are a key reason behind the ongoing grim numbers in state budgets...