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"Overall, the Great Recession and steep drop-off in state revenues will force state policymakers to try to shift voters' expectations about what services and programs government can provide," says CanagaRetna.

The National Governors Association State Economic Review also reflects the breadth of the fiscal problems. Declining revenues at the end of fiscal 2009 made it more difficult for states to enact fiscal 2010 budgets. While in the middle of budget negotiations, a number of states were informed they would have less money available than previously forecast. In the end, eight states were unable to finalize their budget by July 1, the highest number in recent years. States are dealing with the lack of a budget agreement through such methods as issuing executive orders to keep the state running, passing temporary budgets, and giving IOUs to taxpayers, vendors and local governments.

Governments in states without a budget have proposed such solutions as additional program cuts, increasing sales or personal income tax rates and placing slot machines at race tracks to raise additional revenue. Even before the latest grim revenue projections, states realized that painful decisions would need to be made for fiscal 2010.

Assessing the impact on counties

In October 2009, the National Association of Counties (NACo) surveyed a sampling of 138 mid-sized to smaller counties in 34 states to assess the continuing impact of the economy. While media reports have focused on economic impacts on larger counties, the majority of counties are mid-sized or smaller. The NACo survey reveals a widespread impact of the downturn on counties of all sizes from several directions.

Here are some results from the survey:

• More than half — 56 percent — of the counties reported starting their fiscal years with up to a $10 million projected shortfall. Some 82 percent are anticipating shortfalls into the next fiscal year.
• Almost half — 47 percent — say the shortfall increased after the start of their fiscal year.
• Ninety-five percent of counties with additional shortfalls report those additional shortfalls are up to $10 million.
• Sixty-two percent are expecting to receive funds from the American Recovery and Reinvestment Act (ARRA) Transportation funding, and Community Development Block Grants are the most anticipated funds from ARRA.
• Thirty-five percent of counties anticipating ARRA funding had not received any as of the date of the survey.

The shortfalls in revenue included property taxes (52 percent of respondents), state or federal funding (50 percent) and sales taxes (46 percent). Counties reported responding to shortfalls by delaying purchases and repairs (60 percent of respondents), salary/pay freeze for employees (59 percent), delaying capital investments (54 percent), hiring freeze (49 percent) and using rainy day/reserve funds (44 percent).

Economy impacts cities' fiscal health

The fiscal condition of the nation's cities continued to weaken in 2009, according to a National League of Cities' survey of city finance officers. Survey results reflect the fallout from the national recession driven by declining housing values, restrictive credit markets, slowed consumer spending and rising unemployment:

• Nearly 9 in 10 (88 percent) of city finance officers report their cities are less able to meet fiscal needs in 2009 than in the previous year.
• Looking to the close of 2009, finance officers predict city revenues will decline (- 0.4 percent), while spending will increase (2.5 percent).
• City sales tax revenues (- 3.8 percent) and income tax revenues (- 1.3 percent) are predicted to decline by the end of 2009.
• To cover budget shortfalls and balance annual budgets, cities are instituting hiring freezes and laying off personnel, as well as delaying or canceling planned infrastructure projects.
• Ending balances, or "reserves," while still at high levels, decreased as cities used these balances to weather the effects of the downturn.