State finances and recession

The Rockefeller Institute of Government issued, on Jan. 30, a report on recessions and state finances, providing 50-state comparisons of past recessions and their effects, using the 2001 recession as a key reference point. It notes that, in the short term, a recession does not affect states' expenditures as much as tax revenues which are hit by "the ravages of a recession," and makes a cautionary observation:

...the initial response to a recession in the year of a negative revenue surprise typically includes administrative actions or a combination of administrative and legislative actions. These commonly involve across-the-board cuts, reserve-fund drawdowns, and borrowing from other parts of the budget. These actions often have no impact on longer-term structural problems, or can even make the subsequent year's problem worse. States reserve the big guns of large tax increases and spending cuts for the executive budget process, and that process can take several years to play out....

What Will Happen to State Government Finances in a Recession? (pdf, 27pp/1MB)

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In a news release Jan. 24, the National Governors Association (NGA) announced its adoption of an economic stimulus policy for Congress. In a brief information paper, the governors propose countercyclical funding to be made up of Medicaid assistance and a flexible block grant. A longer background paper provides Congress and the Administration with information on the fiscal condition of the states, the potential state role in economic stimulus, and specific policy options. Maintaining that any stimulus package should be "timely, temporary and targeted," the paper proposes six categories for Congress to consider in a formulating such a package:

• General revenue sharing
• Targeted state-federal programs for high-risk populations
• Job creation
• Mortgage default assistance
• Existing regulations (moratoriums to assist states in holding down expenditures)
• Individual income tax and business tax reductions

Economic Stimulus Information Paper (pdf, 4pp/84kB)
Economic Stimulus: A State Perspective (pdf, 11pp/88kB)