This September, state officials are again facing an uncertain fiscal future. There are concerns about the economy and whether state revenues will meet expectations. This is noticeably different than the cautious optimism exhibited this spring when revenue collections were improving and, despite tough budget choices resulting from the end of the Recovery Act funds, state finances beginning to head in the right direction. After experiencing huge budget shortfalls during much of the fiscal 2009-2011 period, state tax revenue was beginning to come in higher than expected in many states. 44 states reported in our spring 2011 Fiscal Survey of States that they expected to be above or at their revenue forecasts for fiscal 2011 -- a big positive change from the prior few years. We're still collecting states’ official figures for the end of the 2011 fiscal year but it's safe to say that state revenue was improving.
Therefore, those of us who follow state fiscal trends thought states had turned the corner and even though many states are not back to their pre-recession budget levels, state revenue appeared to be heading up. Beginning with the volatility of the stock market in early August, though, state officials now face more uncertainty, including the biggest uncertainty regarding the direction of the national economy. While most state officials expect some revenue growth, such growth is expected to be tepid as economists have revised their forecasts downward, such as the recent National Association Business Economists report revising this year's expected GDP growth to a lackluster 1.7 percent.
Still, it’s too early in the fiscal year to be able to speculate how states will fare over the next 9 -10 months since we could have either continued economic growth or a slight downturn. That being said, I think it is likely that a number of states may have to revise their economic forecasts downward.
So, what should we look for? The next set of clues will come when first quarter fiscal 2012 revenues are reported by states next month followed by the performance of the holiday sales period. Of course, most states are extremely dependent on the overall economy so if the economy improves at least somewhat through the end of the fiscal year, I would expect most states will meet their revenue forecast. If the economy gets worse, all bets are off.
I think I reflect most state officials who are watching the economic and fiscal situation cautiously -- and are expecting that while states may have to make slight downward revenue revisions, most states will not need to make significant mid-year budget cuts as in fiscal 2009 and fiscal 2010. It’s just really early in most state fiscal years to be able to know for sure.
By Scott D. Pattison