Budget gaps and balanced-budget proposals in Third District states
The Great Recession has severely tested the strength of state finances and the soundness of state budget practices. Quarterly state tax revenues have declined year-over-year for a record five quarters, from the fourth quarter of 2008 through the fourth quarter of 2009. The depth of decline is also unprecedented, with a 16.5 percent drop in the second quarter of 2009. An immediate consequence is that states are facing massive fiscal shortfalls, triggering rounds of tax increases and service cuts, plus reliance on federal stimulus money, reserves, one-off actions, and borrowing against the future. The Third District states (Delaware, New Jersey, and Pennsylvania) have been similarly affected. Examining how each state is coping with the worst fiscal crisis of the last half-century sheds light on their respective fiscal practices and raises questions for further research. This report describes the scope of each state’s fiscal problems, including current and projected budget gaps, the effect of stimulus funding, and anticipated state-level policy responses. Key findings from this report include:  Budget gap estimates for Third District states vary significantly on a percentage-of-budget basis. The District’s aggregate gap is virtually identical to the national aggregate in FY 2009 and FY 2010, and somewhat smaller in FY 2011 than nationally.  Federal stimulus funding has reduced, but not eliminated, state budget gaps.  Delaware has avoided persistent structural budget problems and has been able to address this budget crisis with a balance of revenue increases, expenditure cuts, and federal stimulus aid, rather than deferring pension payments or employing other one-off strategies.  New Jersey has faced annual structural deficits since at least FY 1994 and will close its FY 2011 $10 billion budget gap in a technical sense. However, by relying on deferred payments and oneoff policies, New Jersey will fail to balance its budget from a long-term perspective.  Revenue declines were smaller for Pennsylvania, but the state has been heavily reliant on stimulus funds, it faces mounting long-term pension obligations, and it is responsible for an unusually large number of distressed cities and municipalities.
Use of rainy day funds in Third District states
Rainy day fund is the popular name for special reserve funds employed by all but three states (Arkansas, Kansas, and Montana) to provide a more flexible response to emergencies and/or cyclical fiscal extremes. This is the primary policy tool designed specifically to help states address fiscal stresses generated by recessions. By transferring a portion of budget surpluses to their rainy day funds during years of strong economic growth and rising revenues, states can reduce the need to raise taxes and cut services during years of weak growth and declining revenues.
Tax Increases Shore Up State Revenue
The author writes that state tax revenue grew by 3.1 percent in the April-June quarter of 2003 over tax revenue in the same quarter of 2002. The April-June quarter of 2003 was the strongest quarter of growth since January-March 2001; however, almost all of the growth in the quarter resulted from net enacted tax increases.