Economy may be rebounding, but state budgets are still hurting

A typical case is Tennessee, according to Pattison. The state got through the past fiscal year with the help of $650 million in federal Recovery Act funds, but is now having to figure out what to do next year without those funds.

“Federal money allowed us to shift money around and at least take another year in thoughtfully reducing the budget instead of blanket, across-the-board decreases,” says Lola Potter, public information officer for the Tennessee Department of Finance and Administration. The state also had a hefty rainy-day fund of $750 million, which will be depleted by next year. One of the other ways Tennessee has been able to stay afloat is to offer employee buyouts, which began in August 2008.

“By offering voluntary buyouts, we were able to close 1,571 positions and save $50 million," says Potter.

Tennessee’s experience is evidence of the falloff in revenue that hits states when people stop buying goods and services, says Corina Eckl, director of the fiscal affairs program at the National Conference of State Legislatures. Most states get a hefty percentage of their state budget from sales tax – 30 to 45 percent. Tennessee has no income tax, so it gets 65 percent of its revenue from sales.

“When people aren’t buying, we start hurting more and more,” says Potter. “The return of the Dow could give them more confidence to return to stores. We’re hoping to get a bounce from pent-up demand.”

One bright spot in the bleak state picture is North Dakota, which has not had to cut budgets because of 20 percent growth in the past year and $1.2 billion in reserves. That has come with lots of planning over the past 10 years, including a diversification of the state economy from primarily agriculture into energy and manufacturing, according to Pam Sharp, director of the state office of management and budget.

She says North Dakota’s basic conservatism helped it avoid the foreclosure crisis because very few homes were purchased with subprime loans. Also, about a decade ago, North Dakota began significant investments in “centers of excellence” – partnerships between state universities and the private sector, to help grow the economy.

“We’ve got a very conservative population and state officials who really think things through carefully,” says Ms. Sharp.

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