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Monday, May 18, 2009

Tomorrow, the Governor is expected to sign a budget that has the unenviable task of closing an $8 billion near-general fund deficit, likely the largest shortfall in state history.*

How did we get to $8 billion? The graph below divides the deficit by 1) the shortfall that was anticipated in June 2008, 2) the increase in cost estimates since June 2008, and 3) the decrease in revenue expectations since June 2008.

About one quarter of the $8 billion deficit was already anticipated in June 2008, after the Governor signed the supplemental budget. In 2007 and 2008, the Legislature maintained long-term investments in key public priorities, but failed to enact revenue solutions that would ensure funding beyond that biennium. As a result, after passing the 2008 supplemental budget, state forecasters estimated there would be a nearly $2 billion deficit by the end of fiscal year 2011.

While the forecasters expected a weak economy, they were not prepared for the economic crises that hit last fall. As the economy plummeted, the state’s deficit forecasts quadrupled.

Here’s why: a suffering economy takes a toll on the state budget both in terms of costs and revenue. On the cost side, the recession increased the need for public supports that provide economic and health security. In total, between June 2008 and March 2009 the estimated price tag of continuing current commitments rose by roughly $600 million.**

But the biggest problem for the state budget comes from the loss of revenue. Between June 2008 and March 2009, the official state revenue projection fell by $5.5 billion, an eight percent reduction. The largest component was a $2.9 billion decrease in expected sales tax revenue because of a sharp decline in retail sales. In addition, the housing crisis took its toll; revenue from the real estate excise tax fell by 25 percent from what was expected in June.

So that’s how we got to $8 billion. Tomorrow we’ll discuss what this year’s budget writers did (and didn’t do) to close the gap.

* Often, projections of budget deficits use estimates of additional policy costs that are not generally included in the maintenance budget. For this analysis, we are only including the stricter definition of the maintenance budget, which results in a more conservative estimate of the deficit.
** $600 million is a rough estimate based on unofficial Senate Ways and Means projections from Summer 2008.

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