By Michael A. Fletcher
Washington Post Staff Writer
Wednesday, January 5, 2011; 11:09 PM
The recession blew a huge hole in the already shaky finances of state governments, causing them to lose nearly one-third of their revenue in 2009, according to a Census Bureau report released Wednesday.
The severe drop in revenue resulted largely from the big investment losses experienced by state pension funds during the worst period of the downturn. Also, the report said, tax revenue slipped while surging demand from newly needy citizens drained the funds that back unemployment benefits, publicly funded health care and workers' compensation.
Overall, total state government revenue dropped 30.8 percent, to $1.1 trillion, between fiscal 2008 and 2009, according to the report.
The economy has improved since the depths of the recession as the stock market has rebounded and states' tax revenue has begun to tick upward. Still, the recession's lingering effects - particularly a national unemployment rate that is hovering at close to 10 percent - have left the vast majority of states with large budget deficits and increasing service demands.
Governors and state legislators across the country are now confronted with a series of painful choices about future service cuts and tax increases.
Next year "will actually be the most difficult budget year for states ever," said Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities. "If you look at the gap between the cost of providing public services and the revenue available to provide them, it remains very large," he added.
States' continued fiscal problems are projected to be a drag on the broader economic recovery as state payrolls are likely to shrink and state contracts to private companies are likely to be pared back.
Despite billions in emergency aid from the federal government through various stimulus programs, 46 states had to raise taxes and make cuts to close a combined gap of $130 billion in their current budgets, according to the Center for Budget and Policy Priorities. Moreover, 40 states already have projected budget gaps totaling $113 billion for next year, according to the center.
At the same time, states are grappling with swollen social service caseloads, underfunded pension funds and flat revenue - a situation that will worsen as federal stimulus aid comes to a halt in the coming months.
Future federal help is considered highly unlikely, as Congress and President Obama have put a greater emphasis on reducing spending and trimming the huge federal budget deficit.
The new census report adds to the bleak portrait that has emerged from other studies documenting the damage caused by the economic downturn, while making plain that states are likely to continue struggling fiscally for years.
"This report paints a fairly compelling picture of the impact of the recession on states," said Susan K. Urahn, managing director of the Pew Center on the States. "There are many states predicting that they're not going to return to pre-recession levels of revenue until 2014."
In Virginia, revenue declined 28.4 percent, to $25.9 billion, between fiscal 2008 and 2009. In Maryland, the decline was 15.9 percent. The report did not break out data for the District of Columbia, but the city said it saw a 5.2 percent decline during that span.
Even as revenue plummeted during the downturn, the report said, state government expenditures grew 3 percent. Those increases were mainly in essential services, including safety-net programs and education.
Those forces, coupled with the past reluctance of many state leaders to drastically reduce services or raise taxes, have resulted in large budget deficits in many states. Illinois, for example, has a budget deficit that is equal to 45 percent of its overall budget, according to a recent report by the Pew Center on the States and the Public Policy Institute of California. In California, the gap is equal to 13 percent of the state's total budget. In Arizona, the gap is 15 percent.
Given the growing fiscal problems, many states are moving more aggressively to rein in their costs. Last year, for example, Virginia raised the earliest retirement ages for its workers and limited cost-of-living increases for the pensions of new employees. Maryland, meanwhile, is in the midst of a debate over how to lower its future pension costs.
Tax collections account for almost half of the general revenue of states, and they plummeted by 8.5 percent between the end of fiscal 2008 and 2009, the census report said. The decline was the first year-to-year drop in tax revenue since 2002, according to the Census Bureau.
The decline in tax revenue was partially offset by a 12.9 percent increase in federal aid, which amounted to $477.7 billion in 2009, the report said.
"The basic point is we need to remember how far we fell in 2007, 2008 and 2009," Johnson said. "We're still 12 percent below where we were in revenue at the beginning of the recession, yet all the needs have gone up."
Staff writer Mike DeBonis contributed to this report.