The fiscal situation facing state budgets has worsened this fiscal year. But that's not the bad news, according to experts who predict the possibility of huge budget shortfalls before things get better.

CIOs attending NASCIO's mid-year conference today in Chantilly, Va., heard the bleak predictions from a panel of experts representing the major state associations for budgets, legislatures and governors. All three agreed that the current situation is manageable. "Spending growth is slowing, but we're still seeing growth," said Scott Pattison, executive director of the National Association of State Budget Officers. Compared to the fiscal downturn that occurred after the bursting of the dotcom bubble and 9/11, this current shortfall isn't as bad, explained Pattison. But he expects the problem to get worse before it gets better. Budget shortfalls could reach as high as $30 billion in fiscal 2009, he said.

William Pound, executive director of the National Conference of State Legislatures (NCSL), quoted similar numbers. As many as 23 states could face significant shortfalls in fiscal 2009, he said. Right now, the problems are spread unevenly across the states, with a handful in serious trouble, while 8-10 states -- primarily those with economies heavily invested in either energy or agriculture -- are doing quite well, with some even forecasting rising budget revenue.

Ray Scheppach, executive director of the National Governors Association, pointed out that the current fiscal difficulties come at a time when the United States faces several long-term domestic challenges: increasing dependence on oil imports, growing global competition, accelerating climate change and rising health-care costs.

"Not only is the price of oil continuing to rise, but 80 percent of the world's reserves are now held by foreign governments -- not multinational corporations -- some of which are not friendly to the U.S.," he said. In the area of health care, the cost of Medicaid has increased 11 percent annually for years now. "It is breaking states and the federal government," he said.

NCSL's Pound said that the rainy-day funds built up during the good years of the decade should be able to sustain states through the next fiscal year. "But FY 2010 could be a problem," he cautioned. The overall economy should be strengthening by then, explained Pound, but the recovery of state budgets tends to lag.

Exacerbating the situation are a number of state spending pressures that will only increase over time. Besides health-care costs, they include demands for greater resources to support our increasingly uncompetitive education system, demographic changes that strain state resources, a growing and aging inmate population skyrocketing transportation costs and ballooning state pension obligations.

Tod Newcombe, Editor  |  Editor, Public CIO