April 14, 2005
States Still Struggling to Keep Budgets Balanced
NCSL's Latest Budget Survey Shows Imbalances for FY 2006
WASHINGTON, D.C. - While most states report that revenues are surpassing estimates, spending pressures for K-12 education and Medicaid continue to plague state budgets. This is the finding of the latest survey of legislative fiscal offices by the National Conference of State Legislatures.
State Budget Update: April 2005 reports that only three states – Michigan, Nebraska and New Hampshire – have seen gaps open since enacting the current fiscal year budget. This a marked improvement from the situation in recent years. In FY 2004, 10 states reported facing gaps after the fiscal year began; the number was 31 in FY 2003.
As an indication of the continuing budget pressures facing states, 31 report FY 2005 spending overruns for some portion of the budget, compared with 23 states in November 2004. Most of the cost overruns are driven by rising costs for Medicaid and other health care programs, but other areas are also over budget include corrections, property tax relief, Temporary Assistance for Needy Families and mental health services.
“States are barely keeping their heads above the rising tide of new costs,” said NCSL President Delegate John Hurson, of Maryland. “Medicaid and other health care expenses, in addition to demands from corrections, state parks, employee health insurance and K-12 education are making it tough for states to do anything but tread water.”
State efforts to address current budget overruns could be more difficult if not for the improving state revenue picture. Most states collected more tax dollars than originally expected in the first eight months of FY 2005. Sales and use taxes are above forecast in 21 states, on target in 18 and below estimate in six. Personal income tax collections are exceeding forecasts in 29 states, on target in 10 and below forecast in just two. As the strongest performing tax category this year, corporate income taxes are above projections in 37 states, on target in six and below estimate in only two states. Some analysts attribute the strength of the revenue growth to low bases and conservative estimates.
Although state finances seemed to stabilize during the year, the reprieve appears temporary.
As lawmakers craft their budgets for next fiscal year, just over half of states report facing another round of shortfalls. Twenty-six states report FY 2006 gaps. In 17, the gaps are above 5 percent of general fund spending. The cumulative gap reached nearly $27 billion, but has declined from that level as lawmakers have taken actions to close the shortfalls.
Not counting the budget shortfalls facing them in the upcoming fiscal year, state lawmakers have closed an aggregate budget gap of more than $235 billion since FY 2001. They did this mainly by slashing spending. Those cuts are now generating enormous pressures for restored funding, state fiscal officers report.
Fiscal directors in about half the states reported their states as having “structural deficits.” These occur when ongoing revenue can’t support ongoing expenses. In most of these states, officials have used spending deferrals, formula aid freezes, borrowing or rainy day funds to balance the books.
A few states are aiming at the roots of their structural problems. Colorado’s imbalance is caused by conflicting constitutional provisions that limit allowable revenue growth and require certain spending levels for K-12 education. Lawmakers are considering a ballot measure to ask the voters to fix this. A task force in Iowa is crafting legislation to restructure government, property taxes and school finance. And tax packages that passed in Nevada, Virginia and Idaho recently were part of efforts to correct disparities in those states.
States not only have to deal with their own budget problems, but also the budget deficit at the federal level. NCSL has recently identified at least $30 billion worth of cost-shifts from the federal to state governments in the proposed fiscal year 2006 federal budget.
“Persistent budget gaps and longer-term structural concerns are evidence of ongoing state fiscal problems," said NCSL Executive Director William Pound. “States could easily be pushed into more dire circumstances if federal cost-shifts to the states continue. This is a fragile time for state budgets."
Credentialed members of the media may receive a complimentary copy of State Budget Update: April 2005 by sending a request to press-room@ncsl.org. Others may purchase a copy by contacting NCSL's Publications Department at 303-364-7812.
NCSL is a bipartisan organization that serves the legislators and staffs of the states, commonwealths and territories. It provides research, technical assistance and opportunities for policymakers to exchange ideas on the most pressing state issues and is an effective and respected advocate for the interests of the states in the American federal system.
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