As legislatures wrap up, hard financial realities plague states

As legislative sessions and budget fights come to a close in the US, states and the industries that do business with them are struggling with the harsh realities of continued budget shortfalls and the end to stimulus spending. CivSource spoke with Robert N. Campbell III, Vice Chairman and U.S. State Government Leader at Deloitte about their 2011 State Government Industry Outlook and what future budget cycles hold for states.

Nearly all states are constitutionally mandated to balance their budgets each year. Historically, this requirement has often led to protracted battles and political upheaval. More recently, these battles have only been compounded by the longer term effects of the recession, high unemployment, resulting revenue loss and the end of the stimulus. According to the Center on Budget and Policy Priorities, states are expected to experience a $119 billion budget shortfall for FY2011 even after some of the most significant across the board budget cuts in recent history.

Campbell notes that in FY2011 and beyond, states will have to come to grips with two key financial problems: the existing, long term fiscal gap between revenue and expenditures, and a broader performance gap between the way the state governments typically operate and the demands of the new economy. According to Campbell and the authors of the report, these two problems will not be solved through small moves such as cutting state workers or increasing vice taxes.

Additionally, states are unlikely to see any additional funding from Congress for the remainder of FY2011, this is further compounded by the end of the stimulus funding which many states were using to close short term gaps instead of providing support to longer term revenue generating initiatives. States may even face new gaps created from funding cuts as federal negotiations over the debt ceiling go forward.

None of this paints a rosy picture for states or their citizens for now and into the future. The situation also highlights the need for deep and structural changes to how state government is managed going forward. Campbell notes that, “on top of all of these gaps and shortfalls, there are currently no conversations addressing the $3-4 trillion unfunded national infrastructure need which will only continue to get worse as the physical structure of our states and cities continues to age and deteriorate.”

Campbell stressed that states will have to push forward on increased public-private partnerships and longer term investment initiatives in order to even have a fighting chance at addressing these significant issues. Indeed, Campbell says, states could learn from other countries which have adopted more modern and mutually lucrative public-private partnership models in order to dig their way out of fiscal holes. States could also do well to examine initiatives to implement commercial best practices for procurement such as the federal government has done in order to cut costs and save time in their private sector vendor relationships.

No matter what happens with the economy or the 2012 election cycle, the problems facing states are unlikely to change and may even get worse before they get better. Campbell who also served on the federal budget commission, noted that at all levels of government in the US legislators are going to have to take a deep structural look at our fiscal portfolio and find balanced ways to increase revenue, manage deficits and finance the long term support of our national infrastructure or face even harsher cuts in the next budget cycle and beyond.

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