Despite serious expenditure declines in U.S. state budgets, the economic stimulus package and federal agency spending are expected to boost major government purchasing through the end of the fiscal year.

Many of the same huge challenges local governments were facing at the start of the year remain. Fortunately, the economic stimulus package signed into law in February is providing a much-needed boost for states’ investments.

The total shortfall of state budgets for fiscal year 2010 — including newly emergent gaps and gaps that have been addressed through budget cuts and other measures — now totals $165 billion across 48 states, according to recently updated reports on state budgets by the Center on Budget and Policy Priorities (CBPP). The combined state budget gaps for the now-concluding fiscal year as well as 2010 and 2011 are estimated to total more than $350 billion.

State governments “are slashing spending, tapping rainy day funds and expanding gaming [in their states] and hiking taxes to deal with their budget gap,” Sujit CanagaRetna, senior fiscal analyst for the Council of State Governments, told Government Product News last month.

The CBPP predicts states’ fiscal problems will continue into the next fiscal year and likely beyond.

“State policymakers face an increasingly challenging battle against an economy that is still getting weaker,” Nicholas Johnson, director of the policy organization’s State Fiscal Project, said in a statement. “There is no letup in sight when it comes to making hard choices.”

Although U.S. state budgets are facing serious declines in expenditure, with a reduction of 24 percent in overall state finances, according to the CBPP, the effects of federal agency spending and the American Recovery and Reinvestment Act (ARRA) are expected to boost major government purchasing through the end of the fiscal year.

“Mayors of U.S. cities…are encouraged by the Obama administration’s fiscal year 2010 budget, and are pleased to see investments in the areas of community development and housing, education, community-oriented policing and high-speed intercity passenger rail — all key priorities for the Washington-based U.S. Conference of Mayors,” Michael Keating writes in part two of his annual Keating Report at GovPro.com.

Meanwhile, the $787 billion ARRA package included roughly $140 billion for states to use in various ways, to help lessen the need for spending cuts, service reductions and other budget-balancing actions as tax increases. These funds were expected to provide states on average with about 40 percent of what they need to keep budgets in balance in the 2009, 2010 and 2011 fiscal years.

Unsurprisingly, stimulus funds haven’t flowed from Washington as quickly as was hoped. While a trickle of spending on infrastructure projects has already occurred, the flow of funds is just getting underway. As it gathers force, major sectors of the U.S. economy are beginning to feel the effects of the stimulus.

“The payout was near $10 billion in the first quarter; it is expected to rise to $80 billion in the current quarter, remain effectively unchanged through this time next year, and then fade quickly after that,” Mark Zandi, Moody’s Economy.com chief economist and co-founder, wrote in June.

“The federal economic recovery act is providing needed relief, reducing the size and extent of cuts and closing roughly 40 percent of state budget shortfalls,” according to the CBPP. “To date it appears that the funds are working as intended. They are enabling states to balance their budgets with fewer cuts in public services that would harm residents and further slow the economy.”

“Each dollar of federal aid to states, according to Moody’s Economy.com, produces $1.36 in increased economic output — a far bigger ‘bang-for-the-buck’ than most other forms of economic stimulus under consideration, including tax cuts,” the CBPP says.

Public works are expected to see the greatest benefit from the stimulus package, with construction starts rising 10 percent, including a 15 percent rise for highways and bridges, McGraw-Hill said in its Construction Outlook 2009 – Spring Update. With $132 billion of the $787 billion ARRA set aside for infrastructure projects of all kinds, highway and street construction contractors may be adding to their fleets in the coming months. Stephen Latin-Kasper, market data and research director for the National Truck Equipment Association, reported to Keating that he expects local government fleet managers will be spending federal stimulus funds on hybrid uplifts to existing trucks and replacing old equipment.

A July 2009 forecast from consultancy Macroeconomic Advisers says government purchases of goods and services could reach $3.02 trillion this year, with federal purchases (consumption and gross investment) accounting for almost 40 percent of total government buys. Federal purchases, according to Macroeconomic Advisers, could rise 8 percent in 2009 over 2008 levels. (Source: Government Product News)

Federal government spending in July 2009 totaled $332.18 billion, compared with $263.26 billion in July 2008. As of Aug. 12, year-to-date federal government spending totaled $3.01 trillion, compared with $2.48 trillion in the first 10 months of fiscal year 2008.

Earlier: Gearing Up for Federal Buying Season

Resources

New Fiscal Year Brings No Relief from Unprecedented State Budget Problems
by Iris J. Lav and Elizabeth McNichol
Center on Budget and Policy Priorities, Aug. 12, 2009

Policy Points: New Fiscal Year Brings Continued Trouble for States Due to Economic Downturn
Center on Budget and Policy Priorities, Aug. 12, 2009

Keating Report: Government Budgets & Spending Outlook, 2nd Half 2009
by Michael Keating
Government Product News, July 28, 2009

New Fiscal Year Brings Painful Spending Cuts, Continued Budget Gaps In Almost Every State
Center on Budget and Policy Priorities, June 29, 2009

Keating Report: Government Budgets & Spending Outlook, 2nd Half 2009, PART 2
by Michael Keating
Government Product News, Aug. 6, 2009

U.S. Fiscal Stimulus Revisited
by Mark Zandi
Moody’s Economy.com, June 22, 2009

Federal Fiscal Relief is Working as Intended
by Phil Oliff, Jon Shure, and Nicholas Johnson
Center on Budget and Policy Priorities, June 29, 200

Construction Outlook 2009: Spring Update
McGraw-Hill Construction, April 11, 2009

Expert: “Federal Buying Season” Can Be a Revenue-Booster to Vendors
by Michael Keating
Government Product News, July 22, 2009

End of Federal Fiscal Year Can be Hectic
by Michael Keating
Government Product News, Aug. 3, 2009

Update: U.S. Govt Spends More than it Makes 10th Straight Month
Dow Jones Newswires, Aug. 12, 2009