The steep loss of state tax revenue resulting from the recession has made budgeting a thorny task for governors and legislators in most every state. But a variety of other factors, including spending levels, civil service compensation and infusions of federal "stimulus" funds also have contributed to the many broken budgets across the country.

With limited exceptions, legislatures nationwide are required to produce a balanced budget each year. But midway into FY 2010, dozens of states are facing serious deficits, and the shortfalls are likely to worsen in 2011. New York, for example, is running about $8 billion in the red, and its 2011 deficit is projected to hit $14 billion. Budget woes in both Arizona and Illinois recently prompted Moody's to downgrade the states' bond ratings. California has had to issue IOUs to avoid default.

Tax collections in many states are expected to remain stagnant for at least another year or two. According to U.S. Census data, sales tax revenues declined 9% in the third quarter of 2009 (the most recent reported) compared with a year-ago, while income tax revenues plunged 12%. Meanwhile, property tax revenues will continue to slide as assessments are revised to reflect depressed real-estate values.

Legislators typically look to exercise four options to deal with revenue declines: raise taxes; cut spending; both raise taxes and cut spending, or use accounting gimmicks. . Reforms, such as the Priority Budgeting model that emphasizes budgeting based on results and core principles of governing, are too often not explored.

Voters understandably have little appetite for higher taxes, at present, and evidence abounds that tax hikes discourage rather than promote economic growth. Spending reductions are politically difficult, as well, but the economic benefits are proven.

Among the obstacles to budget reform is the claim by opponents that budget cuts equate to a reduction in essential government services. But a closer look at the conventional budget process reveals why this isn't necessarily so.

State agencies have incentives to secure ever-bigger budgets from year to year. There is a direct correlation, of course, between the size of a budget and the power wielded by the agency. Moreover, agency performance often is judged on "inputs" (the money spent on programs) rather than quantifiable results.

A funding increase may be warranted to adjust for inflation or an increase in population. In actuality, however, budget growth in recent years has been wholly unrelated to state government's ability to provide core services. Indeed, state spending grew 5.4% from 2007 to 2008; 6.1% in both 2007 and 2006; and, 7.2 percent in 2005-far outpacing inflation and rates of population growth. Thus, budget reductions, more often than not, would represent a slowing of growth, not a gutting of government programs.

In fact, the single largest proportion of every state budget is devoted to the wages and benefits of state employees. Total state expenditures exceeded $2.2 trillion last year, of which wages and benefits amounted to $1.1 trillion. But the compensation average provided to public sector employees far exceed the rates paid by private employers.

Prudent budget management becomes harder to achieve when profligacy is rewarded.
For example, rather than prioritize spending this year and last, states used $250 billion in federal "stimulus" funds to offset 30% to 40% of the deficits. But the federal largesse is only a Band-aid. Once the cash flow from Washington ends, the state deficits will emerge all the worse. In Texas, for example, the state is expected to run a $5 billion deficit-more than 11% of the budget-when the stimulus funding ceases.

Conventional budgeting represents a luxury states no longer can afford. Nor is it effective for Washington to swell the federal deficit in order to temporarily shrink state shortfalls.