June 17, 2011; Source: Center on Budget and Policy Priorities | Forty-two states and the District of Columbia have been working to close a combined $103 billion in fiscal year 2012 budget gaps, beginning July 1. That’s according to a new report from the Center on Budget and Policy Priorities (CBPP). Since many states have experienced stronger-than-expected revenue growth in the past few months, the projected gap for next year is just over half what it was at the recession’s peak in fiscal year 2010. For several reasons however, the impact on the ground may be far worse this coming year.

Fiscal year 2012 shortfalls follow three sustained years of funding cutbacks caused by the largest collapse of state revenues on record. Starting in fiscal year 2009, states began wrestling with $430 billion in shortfalls, which they addressed through spending cuts, reserve draw downs, tax/fee increases, and federal stimulus dollars. Since low hanging fruit has long been picked, new spending cuts projected for next year hit core services particularly hard. States are cutting budgets even for essential services with increased demand as a direct result of poor economic conditions.

What exacerbates the effect is that federal stimulus dollars, primarily through the 2009 American Recovery and Reinvestment Act, will no longer cushion the blow in fiscal year 2012. Combined supplemental federal payments from fiscal year 2009 through fiscal year 201l compensated for an average of 30 percent to 40 percent in state budget shortfalls. Such payments will largely phase out by July 1. Total federal payments from this source will diminish to $6 million total for all states next year. This will cover less than 6 percent of the fiscal year 2012 combined state revenue shortfall.

Finally, recent history demonstrates that state fiscal recovery consistently lags several years behind the official declaration that the recession is over. States with high dependence on sales tax and income tax are particularly hard hit by this dynamic. High unemployment rates and weak consumer confidence continue to dampen revenue forecasts. The resulting cycle of direct state employee layoffs, cancelled vendor contracts, and reduced benefit payments to individuals further holds back recovery.

According to CBPP, the budget shortfall in 2012 could ripple through the economy as a loss of 650,000 public and private sector jobs. And even once economic recovery takes hold, other recent research, such as that sponsored by the Pew Charitable Trusts, notes that most states still face longer term budgeting challenges due to unfunded long term obligations such as retirement systems. Clearly, there’s substantial work ahead.—Kathi Jaworski