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State Budget Update: April 2005

FY 2005 Budget Gaps

Since FY 2001, lawmakers have closed an aggregate budget gap exceeding $235 billion. Although 33 states closed a cumulative gap of $36.3 billion as they were enacting their FY 2005 budgets, only three states faced new ones after the fiscal year began. This is a marked improvement from the situation in recent years. In FY 2004, 10 states faced post fiscal year gaps; the number was 31 in FY 2003.

The three states reporting FY 2005 gaps were Michigan, Nebraska and New Hampshire.

• In Michigan, the general fund and school aid fund gap reached as high as $465 million or 2.2 percent of the two funds combined. (Michigan was one of three states in November 2004 reporting that revenue collections were failing to meet forecasts.)  An executive order eliminated the gap through spending cuts.
• Nebraska reported a $62.1 million (2.2 percent) gap in November, but it grew to $154 million before being closed. In Nebraska's case, the gap was relative to the state's statutory minimum reserve requirement and did not include prior year receipts above estimates that, by law, were transferred to the Cash Reserve (rainy day) Fund.  Additionally, upwardly revised revenue estimates were not yet in place.
• New Hampshire's gap was $41 million (3.1 percent).  

FY 2005 Spending Overruns

More than half the states are reporting budget overruns eight months into the current fiscal year.

• Thirty-one states report FY 2005 spending overruns for some portion of the budget, compared with 23 states in November 2004.
• Rising health care costs and utilization are driving Medicaid and other health care programs over budget--a trend that began several years ago. Through the first eight months of the fiscal year, Medicaid and other health care spending is exceeding appropriations in 23 states (compared with 16 in November).
• Corrections expenses are over budget in 13 states, up from seven in November. In some of these states, pharmaceutical costs and other medical services explain the overruns.
• Property tax relief programs are over budget in Ohio and Maine.
• Massachusetts and New Jersey report that snow and ice removal costs exceeded appropriations.
• Other programs above budgeted levels include Temporary Assistance to Needy Families (TANF), mental health services, district courts, state parks, employee health insurance and K-12 education.  

FY 2005 Revenue Performance

Revenues for the first eight months of FY 2005 are performing better than expected in most states. Some analysts attribute strong growth rates to the low bases on which the increases are occurring. Others note that original forecasts were conservative, so news about collections exceeding estimates is partly explained by these conservative starting points. 

• Thirty-four states have revised their FY 2005 revenue forecasts to reflect improving tax performance. Overall, states expect to meet or exceed their general fund revenue targets for the fiscal year.
• States generally are reporting strong growth in one or more major tax categories. In 23 states, collections are above forecast in all of the major taxes. This mostly includes sales and use, personal income and corporate income taxes. Some states don't levy one or more of these major taxes, but the taxes they do rely on heavily (e.g., severance, meals and rooms), are exceeding expectations.  
• In the 23 states where collections are surpassing forecasts, 14 report that revenues are above the originally budgeted amount. In nine states, collections are above revised projections.
• Sales and use taxes, which represent about one-third of total state own-source revenues, are above estimate in 21 states and are on target in another 18. Six states report that this tax category is below estimate. In Maine, sales tax revenue dropped off in the winter months, with auto sales tax performance being a major reason for sub-par collections. Officials hope that the drain from high heating oil and gas prices will ease in the late spring thereby helping sales tax collections to improve.
• The personal income tax, which also accounts for about one-third of state own-source revenues, is performing strongly in most states. Collections are above forecast in 29 states and are on target in 10. Only two states--Indiana and Missouri--report collections are below forecast (in each instance amounts are below the revised forecast).
• Corporate income taxes, which account for 5.2 percent of state own-source revenues (although in some states the amount is as high as 20.2 percent), are by far the strongest performing tax category in FY 2005. Collections are above forecast in 37 states and are on target in another six. Only Indiana and Massachusetts report sub-estimate performance. In Indiana, collections are down because of significantly large refunds issued in January for prior years.
• The category identified as "other" taxes includes a range of miscellaneous taxes (e.g., estate, insurance premium, real estate). It also reflects those sources that represent a significant portion of state own-source revenues in selected states, like severance taxes in Alaska. Twenty-five states report that other tax categories are performing above estimate, with collections in another 13 on target. Five states report lower than expected collections from other taxes.

Despite the good news about revenue performance, some battle-weary revenue forecasters are not entirely convinced that a strong and permanent turnaround has arrived. In North Carolina, for instance, fourth-quarter estimated payments were very strong. But officials are cautious about April 15 income tax payments because of the 1992 market recovery experience when estimated payments were way up, but final payments were flat.  

FY 2006 Budget Gaps

The fiscal improvement demonstrated in FY 2005 does not appear to have dissolved fiscal problems for FY 2006. As lawmakers craft budgets for the next fiscal year or biennium, half of the states face another round of budget problems.

Figure 1. State Budget Gaps

(in billions of dollars)

Source: NCSL, State Budget Updates, 2001–2005.

• Twenty-six states report FY 2006 gaps. In 17, the gaps are above 5 percent of general fund spending. The biggest projected gaps were in Alaska at 15 percent (although strong severance tax collections have erased the problem), Maine at 12.4 percent and California and New York, each at 10 percent. Both Louisiana and Oregon reported gaps in the 9 percent range.
• The cumulative gap reached as high as $26.9 billion, but has declined from that level as lawmakers have taken actions to close the gaps. In a February survey, 22 states projected FY 2006 gaps totaling $24.7 billion.

State Structural Deficits

Structural deficits are caused when ongoing revenues are insufficient to cover ongoing expenses. A continuing discussion among lawmakers, fiscal staff and others interested in public finance is whether or not structural deficits really exist and, if they do, how prevalent they are.  To answer this question, at least in the near term, this project asked legislative fiscal directors about the situation in their states.

• Fiscal directors in about half the states indicated that their state does face a structural deficit. Most of these noted that state officials have closed the imbalances with spending deferrals, formula aid freezes or borrowing. One-time revenues--from rainy day funds, other reserves, temporary federal fiscal assistance or unexpected tax windfalls--have been an important part of the solution, too. High oil prices have given Alaska a temporary reprieve from its structural imbalance.
• Colorado's imbalance was created by constitutional provisions that limit spending growth and allowable revenue growth, while also mandating certain spending levels for elementary-secondary education. Lawmakers are considering a ballot measure to ask voters to fix the problem.
• Alabama is one of a few states that separate the general fund from an education fund. In Alabama's case, sales and income taxes--considered the growth taxes--are earmarked for the Education Trust Fund, while other taxes are earmarked for the General Fund, which covers programs with high rates of expenditure growth. No actions currently are being taken to address this issue.
• Some states have taken action to understand their structural imbalance or to close it. In Iowa, the governor has initiated a task force on local governance. The task force, which is composed of the governor and 12 legislators, is charged with crafting legislation that would enhance government services by restructuring government, property taxes and school finance.
• At least two states report that recent tax packages were part of an effort to eliminate their structural gaps. In Nevada, the 2003 Legislature approved tax increases after completion of a study that was designed to review and make recommendations to address the structural imbalance in the state's revenue structure. Virginia's 2004 tax package was intended to develop sustainable revenue streams that could support budget obligations.
• Idaho officials reported that a tax package enacted in 2003 was an attempt to eliminate their state's imbalance. Because the package included a temporary sales tax that is set to expire, the imbalance could return.

See Table 8 for more information on state structural deficits.

FY 2005 Spending Overruns
State	November 2004	Additional Programs in March 2005
Alabama	None.	None.
Alaska	Fire suppression ($40 million).	Medicaid.
Arizona	Medicaid.	Department of Corrections.
Arkansas	None.	None.
California	General government and corrections.	None.
Colorado	None.	The Joint Budget Committee has passed approximately $19 million for FY 2005 Medicaid supplementals.
Connecticut	A $74.7 million increase in expenditures is largely attributable to projected deficiencies totaling $61.4 million, the Department of Children and Families ($13.8 million), the Department of Corrections ($13.5 million) and the Office of Policy and Management for energy contingency ($10 million). These numbers represent relatively minor amounts given the size of each agency's budget.	Connecticut's latest statement (as of Jan. 28) indicates the following: The $85.5 million increase in expenditures is largely attributable to projected deficiencies totaling $80 million including the Department of Corrections ($23.3 million), the Department of Children and Families ($12 million), the Office of Policy and Management for energy contingency ($10 million), the Department of Social Services ($8 million), the Department of Mental Retardation ($7.6 million), the Department of Public Safety ($6.5 million) and the Department of Mental Health and Addiction Services ($5.2 million). These numbers represent relatively minor amounts given the size of each agency's budget.
Delaware	None.	Medicaid.
Florida	None.	None.
Georgia	None.	None.
Hawaii	None.	Electricity costs in state buildings are seeing cost overruns ($3 million) due to oil price increases. Autism services at the school level need more funding for contract costs ($11.7 million). Additional funding is needed for support services for developmentally disabled or mentally retarded individuals to live in their communities as an alternative to institutionalization ($7 million). Adult mental health programs at the state hospital require additional funding ($5.4 million).
Idaho	Medicaid and corrections.	None.
Illinois	None.	Temporary Assistance to Needy Families is over budget by $20 million.
Indiana	None.	None.
Iowa	Medicaid.	Medicaid is still over budget; the state now expects a supplemental need in FY 2005 of $70 million. The public defender/indigent defense is over budget by $4.5 million.
Kansas	Medicaid.	None.
Kentucky	(No FY 2005 budget.)	None. (An Executive Branch Budget for FY 2005 and FY 2006 has been enacted only recently.)
Louisiana	None.	None.
Maine	Several programs in the Department of Health and Human Services (DHHS) have been running over budget including Medicaid and Medicaid administration ($33 million) and child welfare ($3.4 million). DHHS is still looking for ways to self-fund these shortfalls. No other significant negative variances have been reported at this time. Given the projected shortfall for the 2006-2007 biennium, most or all of FY 2005 overruns will need to be "self-funded" without a net increase in supplemental appropriations.	The Legislature just enacted a supplemental appropriations act for FY 2005 with net additional appropriations of $51.9 million, which addressed shortfalls in Medicaid ($27 million), other DHHS programs ($13.3 million), and property tax relief programs ($12.5 million). Recent revenue revisions increased general fund estimates by $74 million in FY 2005 providing the additional resources to offset these supplemental needs.
Maryland	Spending shortfalls for FY 2005 could approach $200 million of which approximately $142 million falls under the areas of Medicaid and Mental Health services. Other large components where shortfalls may occur include foster care because of caseload growth and under attainment of federal funds ($38 million), payments to local jails for part of the cost of certain short-term sentenced offenders ($15 million) and a number of smaller miscellaneous programs.	General fund deficiency appropriations included in the governor's allowance totaled $94 million, including $58 million for Medicaid, $21 million for payments to local jails, $5 million for a shortfall in workers' compensation costs, and approximately $10 million for various purposes. Officials estimate that the budget continues to be under funded by approximately $139 million in general funds for employee health insurance ($58 million), Medicaid and mental health services ($50 million), unresolved prior year federal fund charges for the Department of Human Resources ($17 million), and inmate medical costs ($14 million).
Massachusetts	None.	Snow and ice removal costs are $70 million over the original budgeted appropriation, year-to-date.
Michigan	The FY 2005 budget gap reflects a projected $67 million supplemental appropriation for Medicaid due to revised caseload estimates.	The Medicaid shortfall is now projected at $40 million.
Minnesota	None.	None.
Mississippi	Medicaid.	Corrections.
Missouri	Medicaid.	None.
Montana	District courts and corrections department.	Health and human services.
Nebraska	None.	None of significance.
Nevada	None.	None.
New Hampshire	Medicaid and employee health insurance.	None.
New Jersey	None.	Based on the itemization of needed supplemental FY 2005 funding in the executive's FY 2006 recommended budget, the following programs/areas are over budget: 1) state aid to special needs school districts: $102 million; 2) employer FICA contributions: $38 million; public safety (e.g., state police, correctional officers) personnel costs: $24 million; TANF/welfare cash assistance: $14 million; highway maintenance (snow removal): $13 million.
New Mexico	None.	The Department of Health was granted a $5.4 million supplemental appropriation to fund budget shortfalls. Other minor adjustments were also made.
New York	None.	N/R
North Carolina	None.	None.
North Dakota	Medicaid and corrections.	None.
Ohio	Property tax relief is $88.2 million (26.9%) above estimate (likely due to timing issues that should even out by the end of December). Medicaid is $48.6 million (1.5%) above estimate.	Justice and corrections are above estimate by $35 million (2.7%); environment and natural resources is above estimate by $6 million (6.9%); economic development is above estimate by $16 million (16.6%). Both property tax relief and Medicaid are now below estimate.
Oklahoma	The Department of Corrections (DOC) and the Department of Human Services (DHS) likely will require supplemental appropriations.	Supplemental appropriations were approved for DHS, DOC, district attorneys, and common education.
Oregon	None.	None.
Pennsylvania	None.	The administration has requested $118 million in additional state funding for the Medical Assistance program and $20 million for the cash grants program in the Department of Public Welfare.
Rhode Island	Human Services: welfare and developmentally disabled caseloads have increased.	Utility costs and pharmaceutical expenses at correctional facilities.
South Carolina	None.	None.
South Dakota	None.	None.
Tennessee	None.	None.
Texas	Medicaid and K-12 public education.	None.
Utah	None.	None.
Vermont	Medicaid costs are increasing. The state's mental hospital budget is under pressure because of temporary federal decertification and federal funding decisions affecting institutes of mental disease with more than 16 beds. Corrections is up because of caseload and medical services. The state has caseload pressures in child care, and revenue concerns in the state parks and the fish and wildlife budgets. Officials expect to address these and whatever else comes to light for FY 2005 in the budget adjustment process.	No additional programs of note.
Virginia	Medicaid, by about $100 million.	None.
Washington	General assistance program.	Medical assistance ($93 million supplemental) and forest firefighting.
West Virginia	None.	None.
Wisconsin	The administration is projecting a funding shortfall for the Medical assistance program by the close of FY 2005.	None.
Wyoming	None.	None.
Source: National Conference of State Legislatures survey of legislative fiscal offices, March 2005.

 table 2: