The challenges for state budgets will not ease anytime soon. Further reductions of Federal assistance will force many states and local municipalities to find more creative ways to fund projects and balance state budgets. As the article mentions, tax revenues will continue to be lower until the state unemployment levels are back to more normal levels. In fact, the situation is a double-edged sword – not only is income tax revenue down, but the welfare state that is created as a result is also creating a cost burden on those budget bases.
Economists are now forecasting that state and local tax revenues will continue to be down perhaps till 2013 (although there will be some strengthening and improvement between now and then). There is a series of concerns that come along with that delay between an improving jobs market and the resumption of tax revenues. All of those have been widely publicized over the last several quarters, but the net result would be that there is a lot of near term tightening that will still have to be done to balance budgets. Q1 and Q2 of next year will usher in the next rounds of broadly publicized budget challenges (crises in some cases) – likely starting at local city levels.