**From GOVERNING's Outlook in the States and Localities 2010**

The fiscal outlook for cities and counties may be bleak, but it's nothing compared to the economic situation of the states. The second day of Governing's Outlook in the States and Localities 2010 got off to a notably gloomy start, as panelists discussed the dire financial picture that state governments are facing.

"The depth and breadth of this downturn is going to send repercussions for a decade," said Ray Scheppach, executive director of the National Governors Association. Scheppach said states have experienced four consecutive quarters of negative revenue growth, which Scheppach said is "just huge in historical standards." 

According to Bill Pound, executive director of the National Conference of State Legislatures, states suffered a collective revenue shortfall of $117.3 billion in 2009. This year, that gap will grow to $173 billion. Some states last year relied on federal stimulus dollars for up to 20 percent of their general budget.

States are working to increase revenues, raising taxes by $26 billion last year -- a record, in terms of actual dollars. Many of those hikes came in "sin taxes" on tobacco, alcohol and gaming. States also increased income taxes, but those were largely limited to high-income earners who make more than $250,000 a year. 

Of course states have also already made significant cuts in expenditures -- in layoffs, furloughs, spending freezes and so on. "But this cutting is not going to get us where we need to go," Scheppach said. "We're going to have to come up with more inventive ways to deliver services."

In general, states are going to be spending the next several years re-examining exactly what government should look like, said Pound. "States will be asking, 'Should we be [paying for] this? Can we run a parks system?'"

The biggest concern for states is that the current economic crunch goes beyond the financial downturn: There are increasing structural deficits in state governments. Even as the economy turns around, states still will face deeper, more entrenched fiscal challenges.  Public spending on corrections facilities have skyrocketed in recent years, for example. States must look at more transformational changes if they hope to regain structural balance.

But don't look for a radical reinvention of government in the near future. For one thing, with 36 gubernatorial elections this year, states likely won't be engaging in any dramamtic transformations in 2010. In addition to that, most of these kinds of transformational changes can't really be examined until after states have regained at least some stable fiscal footing. "We're still in survival mode right now," said Pound.