reset and they are going to be watching the follow-through very, very closely. >> host: have you decided what your lead is going to be on a piece that you write about this? >> guest: i think my leader is this, he came to downtown cairo instead of going to the resort several hours from here down the red sea down the coast easy to secure, very removed. basically a five-star hotel, the riviera, you know, very remote from the daily life of cairo. the fact that he came here, went to the mosque, drove through the town and came to cairo university show to people that he wants to see who we are and what we are about. >> host: later today he is expected to travel to the presidential palace. what is expected at that meeting? >> guest: well, he did that first to visit president mubarak and even that shows the level of importance. the state welcome included a

worse and flagging the motorcade. all of the circumstances. they didn't have much time together. a few minutes, a little bit of press available afterwards and not much to it. working on this, working on that, weren't a lot of details. >> host: thank you for helping us see the scenes weekend on the coverage. appreciate your time. >> guest: sure thing. >> host: howard schneider on the ground in cairo watching will collection in a coffee shop.

the national governors' association says states are facing their steepest budget cuts in 30 years, spending is projected to fall for the second year in a row. this is a little more of than a half-hour. >> good morning ladies and gentlemen and welcome to the fiscal service of states conference call. at this time all participants are in listen only mode. later we will conduct a question answer session. i will now turn the call over. you may begin.

>> thank you. i'm scott pattison, executive director of national association of state budget officers and with me is dr. raymond scheppach director of the national governors' association. today we are releasing a were fiscal report, which we do twice a year, and we've been doing this report well over 30 years now and on fortunately i have to report these are some of the worst numbers we have ever seen. for example, for the first time ever actual spending for the state is calling to decline this fiscal year, 09, and fiscal year ten, two years in a row. the last time this occurred and the only other time states actually had an actual outright decline in expenditure was 1983 and that was a little below the line about .7%. but me give you some numbers.

state spending is estimated to decline 2.2% this fiscal year 09 which i think everyone knows for most states in this at the end of this month, june 30th. in ten we are projecting state expenditures will have an actual outright to equine of 2.5% and again that's significant both because this is two years in a row the first time but also these numbers are much more significant in terms of decline than the only other decline which was 1983. the restates estimate their fy are nine budgets will be negative. only six were negative 408 to give you a little perspective and comparison and in 2010 we had expect 35 states will have negative budgets in other words year over year they will be spending less and ten than the

year before and then they did in 08. now, one indicator of fiscal stress that is good is the actual cut made to the budgets after passage. in other words after the governor signed the budget and there is a chart that shows the is, but these are fairly stark. we actually have a record for the first time ever 42 states in this particular fiscal year will have gone back and had to cut after passage of the budget. the last time that we saw a significant cots were two years general post non-9/11 rescission period of 02 and 03 and as you can see from the chart 37 states and 02 and 37 states and 03 actually went back and cut the budget following passage and signing by the governor. again significant we were up to 42 for this year. to prove that in perspective, last year fiscal year 08, 13

states had to go back and cut the budget after passage so we've seen a fairly significant change in just one year's time and the other thing i want to emphasize is this report demonstrates how quickly the decline in the state fiscal situation has occurred over the last one or two fiscal years especially indicators like that when you have 13 states cut after passage in 08 and now it's up to 42 for this year. let me say a few words about the budget gaps, the shortfalls the states are experiencing. there are large majorities of states facing shortfalls and a chart here on fellows but 36 states have had to close gaps already during this particular fiscal year 09. we still have 20 states that are still closing gaps and have additional shortfalls. in addition to that for 2010 we expect 37 states to have budget

gaps. now that may grow in 2011 it is very difficult to project that far ahead for fiscal year e. levin for states but so far 24 states are reporting they do have a budget gaps expected in 2011 so about half the states in 2011 expect a budget gap and i would expect that would grow also. let me talk about revenue collections in this report. no surprise to anyone revenue collections are down significantly in all sources of revenue. there are numerous reports recently just finishing up this spring collection period for states that have demonstrated both anecdotally and other wise very significant declines in revenue for the states. currently we are seeing in this report is an overall aggregate 6.1% decline year-over-year in state revenues in the three major sources of revenue, that's sales, personal income and

corporate income tax. in 2009 the current fiscal year revenues exceeded expectations and only two states, wyoming and north dakota, which tended to be anomalies and we had budget gaps where forecasts were not met in 38 states. and again i would not be surprised as we and the fiscal year from the state's june 38th if that number might grow. specifically sales tax collections were 3.2% to work. personal income tax collection 6.6% lubber and corporate income tax, 15.2% over this fiscal year over the last and again on fortunately i believe based on race recent anecdotal data those numbers may understate the decline in the tax revenue situation for states at the end of this particular fiscal year. let me finish up with this report conclusion on balance

levels, balance as a rainy day fund coupled with the end of year balances and there's another good indicator of fiscal health state level and what we see is they are down but they still lag in terms of this was a station and what i mean is they look a little better than the actual fiscal situation. what we see is balances are currently over 5% of state expenditures. that is a fairly significant decline from about 9% last fiscal year 08 and well over 10% fiscal year of seven. although i want to put these columns levels in perspective there's a couple things going on. one is that states don't tend to tap the entirety of the rainy day fund immediately so you would expect those would still exist, but interestingly, texas and alaska account for almost half, about 40% of state

balances in their totality. if you took those hour you would have lower balancing levels. now, some states i should mention are beginning the process of training the rainy day fund so i expect within the next few months some of those will be at zero. now this report unfortunately shows the fiscal situation based on as long as we've been doing this as one of the worst in decades and whether the we have growth budgets in either 2011, 2012 or even 2013 will depend on the length and severity of the recession in addition to other factors. with that and for further explanation i'm going to turn over to the executive director of the national governors' association, dr. raymond scheppach. >> thanks, scott. i just want to do two things. number one, talking little bit about the relationship to the recovery package to these

particular numbers and then second, just stress if you of what i would call the take away or bottom line numbers. in terms of the recovery package it was a total of about 787 billion. of that, about 246 billion actually came to states or three states in terms of entitlements to individuals. of that total, 135 billion was relatively flexible for states and that came out of two categories. first was the 87 billion in medicaid. it's not that the federal money was flexible but it allowed states to take the previous match they were going to do 6.5% or so and use that to potholes and other places and the second piece was a stabilization which was 48 billion that went to education. and because education totals about 30% of the average budget there was a lot of flexibility there as well.

the remaining 110, 111 billion was specific in terms of categories, flexibility to move that money around. and of course be provided flexibility because as economists often say because the balanced budget requirements states actually do the cyclical activity of cutting the budgets and raising taxes makes the downturn deeper and longer. and i think that when i look at the recovery package on think it was positive from a number of standpoints both for the states as well as kaput economy. first the 135 billion was a high percentage of the total that came to the states that this flexible, which was a plus. second, the money came in two areas governors generally tried to protect in terms of budget cuts basically of education and

health care. third, unlike previous fiscal packages that were always too late it looks like this was in fact in time and you've already seen in a number of states where they put cox on hold so the bottom line is that this downturn for the state's perspective would have been a lot worse if we didn't have a recovery package however the economy has continued to deteriorate in spite of the recovery package which is leaving office in -- loss in such a deep hole. a couple other comments to make with respect of the decline. first it is clear that we have got to, possibly three years more of a very difficult time from the state perspective. and if you look at this chart but states have said is their shortfalls over the next three years we've got about a month

left and 2009 and in a tan and and 11 is $183 billion, which is huge from historical standpoint. all i would personally probably argue if i but put on my crystal ball ministates indicated they have a shortage in 2011 but couldn't give a number, so why would give the range that my sense is the bottom line between 200 or 250 billion in terms of deficits over the next three years. if you talk about the middle of the range, i would argue that is on average 75 billion per year over the next three years if you compare that to general fund revenues which are about 640 billion that says essentially 11 to 12% closing its necessary per year over these three years.

second, mengin and the spending the way i look at it, scott mentioned we are down 2% in all nine and expect to be down on other to .5%. about 4.5% over the years. generally spending is up 6% per year so you can see going down 2% is a huge cut relative to the long run. the third point is that in the budgets states are recommending that taxes for 2010 or increased by 24 billion. if you look historically we've seen how numbers at times of 14 or 15 billion but never a member of that magnitude. unfortunately as we go along i think what the governors are going to want to continue to cut budgets but they're going to be forced more and more to look unfortunately on the revenue side.

most of this problem has come on the revenue side, either medicaid has been under control. if you look at detail there is a significant number of states that have seen revenues down between ten and 20% in terms of personal income tax revenues and actually for were five states over 20%. huge revenue falloffs. the only other comment i want to make is we are also headed for a cliff at some particular time this funding from the federal government aims like december december 2010 some time after that when that money goes away and the economy hasn't recovered enough we are going to have another pretty significant problem to address. it is a period when you would want to build rainy day funds, prepare for that but given this kind of situation there is very

little ability to do that. it's interesting even to compare this, scott mengin the back to 1983 in terms of kat's but it's interesting when you look at it that was the one year down seven tenths. 1982 going into that year the spending grip over 6% in coming out on the other side 1984 spending grew 84% so as bad as that was we were down and out of it relatively quickly. this one is going to be deeper and much, much longer so you're not going to have the capacity to build the revenue base going forward. with that, why don't we open it to questions and hold on the conference call and see whether there is any questions in the room. yes? >> what degree are these problems concentrated in

california and michigan? >> i would say these are pretty broad. i mean, those states are probably in that category, florida, nevada, rhode island, you've got a number of others in the category but you have got a whole bunch of others close to that. i think when you look at the other side we ought to move to north dakota because it seems to be the only state doing well but the only states doing well are north dakota, wyoming, states that have had somewhat of an energy base but as i say when you look at the number you have over 20 states, revenue, personal income tax losses between ten or 20% that means it is pretty broad. >> i just want to add it's interesting to us because if you look at the mid 70's period were early 80s early 90's you still have as raymond said a fair amount of states anywhere from

six to a dustin doing fairly well primarily because energy. this is a very different universal with exception of a very small handful of states like wyoming, north dakota. you see this across the country in every region whether it is economy.com, philadelphia reserve, any data shows universal virtually 50 state downturn. yes? >> ai blogs wondering why you think this means for bond financing. will states shy away from it because they are expecting lower revenues or will they turn to bond financing to try to fill in gaps? >> i think it is going to be dependent upon the state i think the overwhelming majority of states will probably do what they would normally do in this recessionary per go to the extent they can turn to bond financing. i think there's a handful of states largely california that

will still utilize bond financing but i think they have their own difficult issues that they have to deal with to ensure they can continue but we have never seen a state default. you saw transportation bonds defaulted on in the thirties, some states are still an exceptionally low risk good investment and so i think investors realize that and i don't expect that to be a big issue. >> anything else in the room? guinn -- yes. >> janeth again. if you look, and i appreciate getting the 11, 12% of the budgets. if you look back into the 80's into the 70's, as a percent of the budgets, is this on a scale you haven't seen or is it similar to the state budget

smaller than? >> i would say again, i think we don't have statistics back to the authorities but i think you've got to go back there. i think this is the worst thing we've seen. most people when we initially hit this downturn thought it would be similar to 83. from what i have seen again we were down in '83, but the year before and the year after we had very good revenue growth so we were down and back very quickly. this started december 2008. so, we were into this all while and we had two or three more years to go so i think it is the depth and length of this. there's no capability to build the revenue base for any funds you're on the base the entire time. yes? >> [inaudible] are any states reconsidering the balance budget in light of the

overall effect of that in fact this looks to be a very long indeed downturn? >> no, i haven't heard of any states discussing that. i think they will always do that frankly because of a bond rating, but i think the choices are dealing on the expenditure side and revenue side tax systems and so forth. >> i think there were 24 states going to be increasing taxes. was that a billion or a million? >> i remember the exact number of states but it's like 25 or 40 states. >> we will check that for you. >> okay. why don't we go to the phone

operator are there questions, phone? >> did you have a question, press start and then one on your touch-tone phone. once again if there's questions press star and then one on your touch-tone phone. we have a question from printable from education daily. go ahead. >> i was wondering if you could discuss education funding by the states a little bit. what impact we are seeing and what they can do to sort of protect programs. >> well, they were beginning to do some cuts in education and then when the recovery package can i think they sort of backed off somewhat in the governors generally like to protect that but i think going forward it's going to be hard to continue to protect it in spite of the recovery package of funding because it is such a significant

portion in other words if you look at health care and education you've got about 70% of your total budget and i think so far what they've done is they've cut the rest of it but now i think going forward they are going to have to look more at higher end, and secondary. >> the next question is from kevin from associated press. go ahead. >> given the economic environment should the federal government continue guaranteeing short-term loans and bond issues from the state's? [laughter] >> well, we certainly don't have a position on that and that does seem to be an issue where the states vary in the positions, just depending on their current

ability or received ability to go out on the markets. i do believe will there was consternation at the beginning of the crisis last fall it is easy to see i think there's a realization that despite the turmoil and difficult fiscal situation from the debt financing side again states compared to other entities are very low-risk and even california is a low risk historic lehane otherwise and i think that over time that will be realized. >> the other thing i would see it is it isn't easy to the federal reserve can't do that legally. i think you would need converse to provide the right and let me just say in the area in terms of broadly the covers are now pushing forward.

>> the next question is from tammie, please go ahead. >> [inaudible] >> the next question is from lisa from abc news, please go ahead. >> my question has to do with the recovery act and fiscal spending with respect when you talk a little bit about how even with the recovery at the decline has gone on if you could speak a little bit more help the recovery act impacted and education, where we are seeing specifically how that has helped. >> okay. as i mentioned, they represent about 135 billion it is the only flexible money that is there. and what it has allowed states to do particularly in the medicaid because it is also the

medicaid money was retroactive to the member of 2008, and it's over 27 months period, but that has allowed states to take back their money because the feds were picking up an extra over 6% share and to spread it around in fact you will find places that money was even used to protect education but from the macroeconomic standpoint it was positive because we have shortfalls of 200 billion going into the before the recovery package and that would have had a larger negative impact. it said the medicaid money and education money to concede as soon as it appeared the bill was going to go through a number of states that already announced cuts were able to put them on hold. the problem is we always figured it would be nice to get 30 to

50% of the shortfall at particular time that is what it panned out to be but the economy deteriorates so much more after that that there is not enough flexible money so i think it was a very, very good policy. a fair amount of flexible money and highly targeted. basically two areas the governors wanted to protect. i'm very positive about the recovery package. but this downturn is much worse than anybody anticipated. >> and if i can follow-up half the states anecdotally said anything to you about the multiplier effect and how they hope that impact the revenues that some of the targeted mullan flexible spending that is supposed. >> well, there is a multiplier effect on all of the stimulus and unfortunately in a lot of the other is going to