After the Housing Slump Subsides, State Budget Shortfalls Could Be Here to Stay

Forget concern about the U.S. sliding into a recession. According to a survey of all 50 state fiscal directors, many states are already in a recession–and as the July 1 fiscal year approaches, the situation may get worse, the New York Times says.

The National Conference of State Legislatures report, released Friday, said that "whether
or not the national economy is in recession– a subject of ongoing
debate — is almost beside the point for some states."

The funding shortfalls are so severe in some areas of the country, it looks like–even once the housing slump does noticeably improve–states may be dealing with the housing market fallout for years to come.

Housing has already taken a toll on the economy (which has, in turn, taken a toll on housing): Because home equity is dropping, many homeowners don’t want to invest in their home, so furniture and appliance sales are declining.

At the same time, people are spending less in general because higher gas and food costs are eating up their cash. 

And the slowed economy is hurting tax revenue–some states are really suffering, such as:

  • Delaware: The state’s funding has a $69 million gap this year.
  • California: The report predicted California would have a $16 billion budget shortfall over
    the next two years.

Florida, too, doesn’t expect its revenue situation to improve quickly because of how long its housing slump has been going on, the Times says.

And Florida is not alone. Sixteen states reported budget shortages because taxes had come in less than earlier estimates by mid-April; that’s twice the number of states that posted a deficit six months prior.

And the upcoming fiscal year may not be much better. Twenty-three states are currently reporting a total of $26 billion in budget shortages, according to the NCSL–more than two-thirds say they’re worried about budgets for next year.

With good reason: The Center on Budget and Policy Priorities
said last week that 27 states are reporting projected budget shortfalls equaling at least $39 billion next year.

We’ve been so focused on improving the housing market, it’s possible we’ve lost sight of its far-reaching effects–but make no mistake, dealing with sharply reduced state budgets on the heels of a prolonged housing slump is not going to make life easy.

In fact, as the economy slows and we try to climb out of a housing decline–and potential national recession–we’re going to need those state programs and aid more than ever.

No one wants to see education or other necessary programs suffer. But there are even more pressing problems, such as shelter. The rising number of foreclosures in the U.S. alone are going to
increase the need for housing–some of it will need to be affordable or
aid-based.

So what can we do now to help buffer the housing decline’s effect on state funding? Is it time to reconfigure and trim budgets know, anticipating a further decline in tax revenue? Or should the Fed be addressing the problem and increasing state financial allocations?

What do you think?