State Budget Actions FY 2006 and FY 2007

This report is available freely to state legislators and legislative staff and for $35 to the general public. This page contains its executive summary and table of contents.

Executive Summary

State Budget Actions FY 2006 and FY 2007 presents the findings from NCSL’s annual survey of legislative fiscal offices on state budgets for fiscal years (FY) 2005, 2006 and 2007 (projected). It includes general fund budget information for 50 states. American Samoa, the District of Columbia, Guam, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands did not provide information for this year’s report.

State Budgets in FY 2006

The state fiscal recovery that began late in FY 2005 grew stronger in FY 2006. Robust revenue growth that vastly exceeded projections boosted year-end balances and supported spending above originally budgeted levels. Here are the highlights.

Aggregate year-end balances, which include rainy day fund amounts, rose from $46.4 billion to $57.8 billion, nearly 25 percent from FY 2005 levels.
Balances as a percentage of spending rose to 9.9 percent, 1.3 percentage points above the 8.6 percent level in FY 2005.
Thirty states saw their balances rise from FY 2005 to FY 2006, 19 saw them decline, and one state reported no year-over-year change.
The number of states with balances above 5 percent rose slightly, with 39 states above the 5 percent mark. Twenty-four of these states had balances above 10 percent. The corresponding numbers at the end of FY 2005 were 38 and 22, respectively.
Rainy day fund balances grew 23 percent, rising to $28.6 billion at the end of FY 2006. They represented almost half of total year-end balances.
Originally projected to grow 2.7 percent, FY 2006 revenues rose 7.7 percent above FY 2005 collections.
General fund spending grew 8.4 percent above the FY 2005 level instead of the 5.8 percent originally budgeted.

State Budgets in FY 2007

Due to the uncertainty around the sustainability of recent revenue growth rates, lawmakers were cautious in developing their FY 2007 budgets. Modest revenue growth projections are expected to lag budgeted spending levels, so year-end balances are forecast to decline. Overall, however, state fiscal conditions are expected to be solid.

Aggregate year-end balances, which include rainy day fund amounts, are projected to decline from $57.8 billion to $41.2 billion, nearly 29 percent from FY 2006 levels.

The aggregate balance as a percentage of general fund spending is forecast to be 6.5 percent, more than 3 percentage points below the 9.9 percent level at the end of FY 2006.
Thirty-four states predict their balances to fall from FY 2006 levels. Fourteen forecast them to rise, and two expect no change.
The number of states with balances above 5 percent is estimated to fall, from 39 states at the end of FY 2006 to 31 states at the end of FY 2007. The number of states with balances above 10 percent also is expected to decline, from 24 to 14.
Rainy day fund balances are estimated to fall from $28.7 billion to $24.6 billion by the end of FY 2007, nearly 14 percent. Despite this forecasted decline, rainy day funds are expected to represent a larger share of total year-end balances than they did the prior year (approximately 60 percent versus 50 percent).
Nationally, general fund revenues are projected to grow 3.1 percent above FY 2006 collections.
General fund spending is budgeted to increase 7.5 percent over FY 2006 levels.

Use of Unexpected Revenues

Unexpected revenue growth in FY 2006 meant that additional funds were available for disposition in FY 2006 (through supplemental appropriations) and in the FY 2007 budget deliberation process. Highlights of state actions include the following.

At least 26 states boosted reserve funds levels (rainy day funds, other state reserves or both).
Many states targeted state programs or services for extra funds, including K-12 education (25 states), higher education (21 states), Medicaid (15 states) and corrections (11 states). Capital projects also were popular.
Other categories that benefited from unexpected revenues were employee salaries or benefits (14 states), pension systems (eight states) and aid to local governments (six states).

State Spending Categories in FY 2007

This report tracks spending for four major budget categories: elementary and secondary (K-12) education, higher education, corrections and Medicaid. Halting a six-year trend, Medicaid is not expected to be the fastest growing category of general fund spending in FY 2007, but is expected to be displaced by K-12 education. Note that overall general fund spending for FY 2007 is budgeted to grow 7.5 percent. These are the highlights for the four spending categories.

General fund spending for K-12 education is budgeted to grow 7.9 percent (5.3 percent when total state funds are considered).
General fund support for higher education is budgeted to grow 6.3 percent (6.7 percent when total state funds are considered).
Corrections spending is slated to grow 5.7 percent over FY 2006 levels. Unlike the other state budget areas reported here, corrections funding is almost entirely supported by the general fund.
General fund support for Medicaid is budgeted to grow 6.3 percent (4.8 percent when total state spending is considered).

Executive Summary
Introduction

State General Funds
Special Funds
Year-End Balances as a Measure of State Fiscal Health
The Need to Maintain Reserves
Balanced Budget Requirements
Interstate Comparisons
State Budget Cycles

Recent State Fiscal Conditions

A Longer View of Year-End Balances
Rainy Day Funds

State Finances in FY 2006

FY 2006 Year-End Balances
Changes in Revenue and Spending in FY 2006

State Finances in FY 2007

Revenue and Spending Projections for FY 2007
Use of Unexpected Revenue in State Budgets

State Spending Categories in FY 2007

K-12 Education
Higher Education
Corrections
Medicaid

Appendices

Budget Stabilization Funds, FY 2005, FY 2006 (estimated) and FY 2007 (projected)
Components of State Year-End Balances, FY 2006 (estimated) and FY 2007 (projected)
FY 2005 General Fund Budget Figures
FY 2006 General Fund Budget Estimates
FY 2007 General Fund Budget Projections
Uses of Unexpected Revenues: Increased State Reserve Funds
Uses of Unexpected Revenues: Targeted Certain Programs or Projects for Funding Increases
Uses of Unexpected Revenues: State Operations
Uses of Unexpected Revenues: Other Actions
Estimated State Spending for K-12 Education, FY 2005 to FY 2007 (projected)
Estimated State Spending for Higher Education, FY 2005 to FY 2007 (projected)
Estimated State Spending for Corrections, FY 2005 to FY 2007 (projected)
Estimated State Spending for Medicaid, FY 2005
Estimated State Spending for Medicaid, FY 2006 and FY 2007 (projected)

List of Figures and Tables
Figures
1. State Year-End Balances as a Percentage of General Fund Expenditures FY 1981 to FY 2007 (projected)
2. Rainy Day Fund Balances, FY 1996 to FY 2007 (projected)
3. FY 2006 State Year-End Balances as a Percentage of General Fund Expenditures
4. FY 2007 State Year-End Balances as a Percentage of General Fund Appropriations (projected)
5. Major Components of General Fund Appropriations, FY 2007
Tables

State Year-End Balances as a Percentage of General Fund Spending, FY 2005 to FY 2007
Estimated Percentage Changes in General Fund Revenues and Expenditures, FY 2005 to FY 2006
Projected Percentage Changes in General Fund Revenues and Appropriations, FY 2006 to FY 2007
Projected Percentage Change in State Appropriations, FY 2006 to FY 2007
Percentage Change in Spending for K-12 Education, Compared with Previous Year
Percentage Change in Spending for Higher Education, Compared with Previous Year
Percentage Change in Spending for Corrections, Compared with Previous Year
Percentage Change in Spending for Medicaid, Compared with Previous Year

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