State Budget Update: April 2004

Small improvements are big news for state budgets as they emerge from historically bad fiscal conditions. After years of budget gaps, policymakers now see a glimmer of hope on the horizon. State finances have stabilized, at least for fiscal year (FY) 2004, according to an April survey conducted by the National Conference of State Legislatures (NCSL) (note one). Although the longer term continues to pose fiscal challenges, their magnitude has diminished compared with the situation during the past few years. While budget surpluses were virtually unheard of recently, modest ones now are starting to appear.

With FY 2004 drawing to an end, most states have resolved lingering budget gaps. Twenty faced an aggregate gap exceeding $5 billion after the fiscal year began--on top of the $78.4 billion they closed going into FY 2004. In addition to budget cuts and other actions, many states reported that stronger than expected revenue performance is helping shore up state budgets.

This improvement, albeit slight, has led 32 states to project budget surpluses by the end of FY 2004. Although most surpluses are modest--less than 2 percent in half the states--they represent fiscal improvement and are a welcome development. In five states, the projected surpluses exceed 5 percent.

Despite this improved fiscal picture for FY 2004, concerns remain for FY 2005. At least 33 states struggled with an aggregate gap of $36 billion as they negotiated their FY 2005 budgets. On the positive side, the gap is half as large as states faced a year ago. Moreover, about a dozen states project surpluses by the end of FY 2005, although the amounts tend to be small.

Although the magnitude of fiscal problems has eased, policymakers remain wary about the future. Most have implemented multiple rounds of budget cuts and have depleted reserves. At this point in the fiscal crisis, there are fewer options to address budget problems. Simultaneously, state officials face pent-up spending needs, especially for those programs that have been cut, and growing health care costs. While the economy seems to be on the upswing, the strength of the recovery and its effect on state finances has been uneven. As one fiscal officer noted, "We think we've hit bottom on the economy. Now we're hoping to turn the corner."

These are the highlights from NCSL's survey:

FY 2004 Highlights

Twenty states have encountered budget gaps so far in FY 2004. The aggregate gap that opened after FY 2004 began reached $5.3 billion. Because policymakers have been taking action to resolve the imbalance, the current figure is down to about $720 million. This followed state actions to resolve budget shortfalls that totaled $78.4 billion when they began work on FY 2004 budgets in 2003.
As an indicator of state fiscal improvement, 32 states now expect to end FY 2004 with a surplus (note two). Rainy day funds will boost FY 2004 ending balances even more, although those amounts are not yet known. In nine states, the surplus is less than 1 percent of general fund budgets. Florida, Nevada, Oklahoma, South Dakota and Wyoming project surpluses in excess of 5 percent.
The cumulative year-end surplus projected for FY 2004 is $6.4 billion, slightly above the surplus projection made in February ($5.6 billion).
State revenue performance has improved during FY 2004, although unevenly across the major taxes and the states. A review of the information, which includes collections through March, does not reveal any strong regional patterns.
- In 18 states, personal income tax collections are above the budgeted estimate. In 12, they are on target. But in 11 states, these collections are below estimate. Because April is such an important month for personal income tax collections, final figures on tax payments and refunds could change the overall performance of this tax source. Personal income tax collections represent just over one-third of state tax collections. Nine states do not levy a broad-based personal income tax.
- The sales tax is performing more strongly for most states than the personal income tax. Twenty-two report that collections are above forecast. Nevada reports that sales tax revenues for the first seven months of the fiscal year were significantly higher than projected (11.3 percent actual vs. 5 percent projected). Another 14 states report that sales taxes are on target, and in nine they are below estimate. Sales taxes represent about one-third of state tax collections. Five states do not levy a statewide sales tax.
- More than half the states reports that the corporate income tax is exceeding target. In another 11 states, collections are on target. Eight report lower than budgeted collections. Corporate income taxes represent about 6 percent of state tax collections. Five states do not levy a corporate income tax.
- Eight states--Alabama, Delaware, Florida, Iowa, Maryland, New Jersey, Oklahoma, and Tennessee--report that all major taxes are performing above expectations.
- The performance of other taxes and revenue sources (severance, estate, gaming, etc.) varies considerably. Severance taxes are up in several states, including Alaska, Louisiana, New Mexico and Wyoming. Connecticut, Delaware and Florida report that real estate taxes are above forecast. Florida also reports that tourism-related tax revenues are above estimate. Montana indicates that investment earnings are significantly below forecast.
Spending overruns continue to exert pressure on FY 2004 budgets. Twenty-eight states report that spending is exceeding budgeted levels. More than half of these say that Medicaid or other health care programs are exceeding budgeted amounts.

FY 2005 Projections

FY 2005 budget projections clearly indicate that the states are continuing to face fiscal challenges, although on a smaller scale than in recent years. Thirty-three project budget gaps, and most still are in the process of resolving them.
The aggregate FY 2005 estimated gap reached $36.3 billion, slightly higher than the FY 2005 gap projected in February ($35.6 billion). Because states are in the process of closing those gaps, the current estimate is $25.1 billion. At 41 percent of the total, California's $15 billion shortfall dwarfs other states' gaps.
Despite FY 2005 budget gaps in two-thirds of the states, some anticipate more positive conditions. At least 12 project surpluses (above money they hold in their rainy day funds). The cumulative surplus is forecast at $1.9 billion. Because Wyoming has a mechanism that automatically deposits excess revenues into the rainy day fund, it does not appear on the list of states with surpluses. But like the other severance tax states, Wyoming has enjoyed revenues above original forecasts.
While the news about surpluses bodes well and signals improvement, amounts are modest. Several states--Hawaii, Ohio, Oregon and Texas--project surpluses below 1 percent. The highest projected surplus is 9.9 percent in South Dakota.

Tables

Please refer to the full text of the report for these tables.

Estimates of FY 2004 Budget Gaps
Estimates of FY 2004 Budget Surpluses
Performance of Major Tax Categories (Personal Income Tax and General Sales)
Performance of Major Tax Categories (Corporate Income Tax and Other)
FY 2004 Budget Overruns
Estimates of FY 2005 Budget Gaps
Estimates of FY 2005 Budget Surpluses

Notes

This report is based on information collected from legislative fiscal directors in April 2004. It covers the revenue and expenditure situation for most states two-thirds of the way through FY 2004. Forty-six states began their fiscal year on July 1. The four exceptions are New York (April 1), Texas (Sept. 1), and Alabama and Michigan (Oct. 1).
Some states have mandatory year-end balance requirements. Because those states will end the fiscal year with a positive balance, they are counted among the states with budget surpluses for the purposes of this report.

See a list of previous State Budget Updates.

Posted April 28, 2004.
Email statebudget-info@ncsl.org for more information.
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