Over a cliff: a horrible state budget situation is just getting worse.

• Author: Smith, Edward

The news for state budgets probably could be worse, but it s hard to imagine how.

The latest state budget update report from the National Conference of State Legislatures paints a bleak picture not only for FY 2010, but for FY 2011 and possibly beyond. As more than one fiscal officer observed in the survey released in April, this is the worst situation for state budgets in recent memory.

"This report emphasizes the very difficult road ahead for states in the next two fiscal years," says William T. Pound, NCSL executive director. "Legislators already have made a lot of hard choices. It's tough to see where they can find additional places to cut spending and raise revenue."

The numbers alone are staggering. States already have closed a monumental gap of more than $102 billion for FY 2009. The outlook for FY 2010: a breathtaking $121.2 billion, based on projections by 42 states and Puerto Rico. And no one following the situation thinks that will be the end of the shortfalls for next fiscal year. The report also includes projections from 16 states and Puerto Rico of an additional $44.5 billion shortfall in FY 2011, which means states conservatively are looking at a gap of more than $165 billion in the next two fiscal years.

"The only bright spot," the report says, "is the onset of federal stimulus funds. Without that money, state finances would be even more dismal."

PERSISTENT RECESSION

The federal aid, however, may turn out to be cold comfort given what the future holds, says David Wyss, chief economist for Standard & Poor's.

"We've got another six months to go on this recession, and another year to go before we see a peak in the unemployment," he said in late March. He anticipates the jobless rate reaching 10 percent, just below the 10.8 percent experienced during the 1982 recession.

When it comes to state governments, things are even grimmer. "State government revenues tend to lag the economy, and next year is going to be the worst for state budgets," he said.

The key revenue sources for states--personal and corporate income taxes and general sales tax revenue--all are in a deep trough; they also tend to lag both the economic downturn and the recovery. That means as prospects for other sectors of the economy brighten, states will still be under a heavy fiscal cloud.

Economist Donald J. Boyd, a senior fellow at the Nelson A. Rockefeller Institute who tracks state revenues, says his latest revenue study was shocking.

"We're now really seeing...