The economic downturn has left us with unprecedented fiscal challenges and a projected $3.5 billion shortfall for fiscal year 2010. There are 3 main drivers that contribute to the projected shortfall: a reoccurring structural deficit from previous fiscal years, natural growth in spending to maintain existing programs and declining tax revenues.
Tax revenues have fallen precipitously below original projections for the current fiscal year (fiscal year 2009) and for what was assumed at the time the Administration developed its maintenance estimates for fiscal year 2010. Revenues are now projected to be about $1,872 billion below the amounts on which this year's budget was built - and over $1.4 billion below revenues from the previous fiscal year (fiscal year 2008). According to the latest consensus revenue estimate, virtually no revenue growth is anticipated for the coming fiscal year (fiscal year 2010).
This problem of declining revenues is compounded by a structural budget deficit, with natural growth in spending outpacing growth in recurring revenues. For some years, only strong growth in our most volatile source of tax revenue - capital gains tax revenue - filled this structural gap. In fiscal year 2008, however, even growth in capital gains revenues was not sufficient to fill the gap, and the state budget was ultimately balanced using over $500 million in one-time revenues (including $315 million from our Stabilization Fund, and $194 million from the Health Care Security Trust Fund). Thus, for the first time since 2001, the balance in our Stabilization Fund fell - even before the current recession hit.
The current fiscal year's budget was predicated on using $401 million of Stabilization Funds to support current year expenditures. This means that a structural deficit of $401 million was the starting point for developing a fiscal year 2010 budget, before accounting for growth in spending and the dramatic decline in revenues.
The fiscal year 2010 budget challenge is further compounded by the fact that there are significant pressures on expenditures in fiscal year 2010 for a relatively small number of cost items, including Medicaid, Chapter 70 education aid, and other programs. Expenditures needed to provide the same level of services that were provided in fiscal year 2009 would require an increase of nearly $1.7 billion. After factoring in the October 9C reductions, increases are still expected to cost approximately $1.2 billion.
In combination, the use of reserves in 2009, the projected growth in costs to maintain programs and services and a precipitous decline in tax revenues have resulted in a projected shortfall for fiscal year 2010 of approximately $3.5 billion.