Governors See Bad Economic Times Getting Worse for States

Despite some signs of national economic growth in Q409, such as an improvement in housing prices and an uptick in home sales, the fiscal conditions of states continue to worsen, according a survey from the National Governors Association (NGA), a bipartisan organization of the 50 state governors, as well as representatives from US commonwealths and territories.

In recessions past, the survey finds, impacts on the individual states usually lag one to three years behind national pains and gains.

General fund spending among the states dropped 3.4% in 2009 and 5.4% in 2010, based on enacted budgets. The only other annual decline in state spending occurred in 1983, when it dropped 0.7%.

Additionally, state tax collections decreased in the last two quarters of 2009 and will drop again for the first two quarters in 2010, according to a report from the Rockefeller Institute of Government. The last three quarters saw drops of 10.9%, 16.4% and 11.6% – the largest reductions on record.

States enacted tax and fee changes for 2010 to regain an estimated $24.9bn in additional revenue. Other measures, including tax-cut deferments, fund transfers and tax amnesty programs – which allow delinquent tax-payers to pay owed amounts over a period of time – could bring in another $7.7bn for 2010.

Due to the declines in revenue, 43 states cut $31.3bn in 2009. Even with new revenue in 2010, 36 states will cut $55.7bn. States also shed 18,000 jobs in January 2010, according to the Bureau of Labor Statistics.

According to RealtyTrac, the online foreclosure marketplace, more than 50% of all foreclosures took place in California, Florida, Arizona and Illinois. California also leads the way in mortgage modifications under the Home Affordable Modification Program (HAMP).

The US Conference of Mayors, another nonpartisan organization that represents cities with populations greater than 30,000, sent out an industry warning in November 2009 that they expect employment rates to continue to climb in 2010, reaching levels as high as 15% in some municipalities. Dave Gatton, director at the firm, said that servicers in these areas should prepare to face a much heavier distressed asset portfolio as borrowers struggle to cope with lose of income.

Gatton added that local government received very little amounts of bailout money and will likely not have an infrastructure to support these servicers.

“By just about any measure, the last two years have been the most difficult fiscal period for states since the Depression,” according to the survey. “States foresee fiscal year 2011, which starts for most states July 1, 2010, to be the most difficult to date, and few see fiscal year 2012 much better.”