A new report out by the Nelson A. Rockefeller Institute of Government makes it clear that states are still in big fiscal trouble, having experienced a record drop in sales tax for the second quarter in a row.

While the recession may be slowing, and the nation may even be recovering, clearly states are in this economic slowdown for the long haul. My co-blogger Alyson is working on a story about this for our next issue, and I’ll link to it as soon as it’s finished.

For education, this persistent bad economic news at the state level means that the stimulus-generated funding cliff that states and school districts have been warned about is not just a threat, but a reality.

States have had a tough time making do even with some $40 billion in state stabilization stimulus funds, as many states have used this money to backfill cuts and free up money to balance other parts of their budgets. In 2011, that money officially runs out, which will make balancing budgets--and maintaining K-12 funding levels -- extremely difficult.

This has implications for the competitive grant programs, such as Race to the Top, as well. Pushing through education reforms can take a lot of political will at the state level. But so does balancing budgets. Will there be enough political will to go around?

What’s more, award money from Race to the Top may seem mighty tempting for a cash-strapped state. The $4 billion competitive fund isn’t nearly as large as the state stabilization fund, and would likely amount to a few hundred millions of dollars for each winning state, but it’s still valuable money for a financially strapped state. While states certainly will have to agree to make good on their Race to the Top promises, policymakers in states that win an award might be inclined to reduce education funding elsewhere in light of the extra money coming in from the U.S. Department of Education. After all, we’re seeing a similar phenomenon now, with criticisms of how states are using state stabilization funds.