States face bleak economic forecast, report says

States are caught in a fiscal vise as weak economic growth, dwindling federal help and increasing appeals from hard-pressed local governments squeeze their budgets.

Things have improved since the worst of the recession, but states still face a dire fiscal situation, according to a report to be released Tuesday by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

The Fiscal Survey of States says that even as states struggle with tepid revenue growth, they will be called on to spend more because of the economic distress caused by continued high unemployment.

“State budgets are certainly improving; however, growth is weak, and there is not enough money for all the bills coming in,” said NASBO Executive Director Scott Pattison. “State officials will still be cutting some programs, and increases in funding for any program except for health care will be rare.”

The report says that Medicaid, the combined federal-state health program for the poor and the disabled, will place the biggest budgetary burden on states. Because of increasing caseloads, declining federal help and spiraling health-care costs, state Medicaid spending is growing much faster than state revenue, crowding out funding for other priorities.

The federal government had provided extra Medicaid help to states as part of the stimulus program. But that help has ended, prompting states to increase their Medicaid spending by an average of 29 percent this fiscal year, according to the Kaiser Family Foundation.

Many states have streamlined their Medicaid programs in an effort to control costs. Still, officials in more than half of the states said in a recent survey that there is an even chance that their Medicaid programs will face a budget shortfall as enrollment continues to increase.

Officials say the fiscal pressure that Medicaid puts on states is expected to increase when the federal health-care overhaul takes effect in 2014. Although the federal government is required to pick up the costs for people newly eligible for the program, many who are now eligible but not enrolled are expected to be drawn in, and states must shoulder part of those costs.

States are also struggling to meet the needs of local governments. Many states cut aid to localities during the recession, and many of them want it restored.

“Local governments are still seeing declines in their revenues, because even if property values have stabilized, property taxes tend to follow a couple years behind,” said Dan Crippen, the NGA’s executive director. “Property taxes are coming in much lower for school districts and cities and counties.”

The report says that although state general fund revenue increased in 2011 and is expected to increase 2012, it remains $21 billion below 2008 levels. In addition, states are bracing for further reductions in federal aid that are likely to come from Washington’s efforts to slow the growth of the deficit.

The fiscal pressure on states has become a drag on the job market; local and state governments are shedding jobs, even though the private-sector job market has shown signs of improvement.

State and local governments have cut 455,000 jobs since the beginning of 2010, and public-sector jobs account for the smallest share of the nation’s employment since the 2008 financial crisis, according to the Bureau of Labor Statistics.

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Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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