August 17, 2005
State Budget Crisis Ebbs, According to NCSL’s Latest Fiscal Survey
States expect to end FY 2005 with an aggregate balance of 7 percent
SEATTLE – State budgets are healthier than they’ve been in five years thanks to improving revenues and careful balancing of priorities by state legislators across the country, according to State Budget & Tax Actions 2005: Preliminary Report, released today by the National Conference of State Legislatures during its “Strong States, Strong Nation” 2005 Annual Meeting.
The 46 states that responded to NCSL’s budget survey ended fiscal year (FY) 2005 with an aggregate balance of $35.7 billion – an 8 percent increase from FY 2004. Wall Street analysts recommend a balance of at least 5 percent. States ended FY 2005 with 7 percent. That’s almost twice what they projected. No state ended FY 2005 with a deficit.
Legislative fiscal directors are projecting to end FY 2006 in the black as well – with an aggregate balance of 4.7 percent. At the same time, however, they expect spending to rise by 5.7 percent, mainly because of Medicaid, education and other needs.
“While we’ve turned the corner on this budget crisis. It’s only a recent development at this point, so we’re still feeling the effects and will for a while,” said NCSL President Del. John Hurson, of Maryland. “But I think that state legislators and American citizens should be commended for making and enduring the painful cuts of the past that have brought us to this point of recovery.”
Between FY 2001 and FY 2004, state legislators closed an aggregate budget gap of more than $235 billion. Temporary federal aid of $20 billion, half of which went toward Medicaid, helped. To bridge the rest, legislators had to cut programs, raise revenues and tap reserves
Rising revenues are a major factor in states’ improved fiscal health. FY 2005 revenues were 6.8 percent above FY 2004 levels. In 29 states, they were up more than 5 percent, with eight of these above 10 percent. In a departure from recent years, no state reported a decline in revenue.
Most of the revenue growth can be attributed to a general improvement in the nation’s economy. Some states did take tax actions in 2004 that brought in more funds as well. Last year’s actions generated $4.1 billion in additional revenue to states in FY 2005.
Because of large increases in Medicaid spending and the replacement of temporary federal aid in the previous two years, state spending rose 6.8 percent in FY 2005. Thirty-seven states spent at least 5 percent more than they did in FY 2004.
States also saved in FY 2005. Rainy day fund balances rose almost 14 percent to $20.3 billion.
Legislative fiscal directors expect the same forces that boosted FY 2005 spending to be at work in FY 2006. General fund support for Medicaid is budgeted to grow 7.2 percent in FY 2006, due, in large part, to rising health care costs. States budgeted 6 percent more for K-12 education and 5.7 percent more for higher education then they did last year. General fund spending for corrections is slated to grow 3.8 percent.
“States are feeling pressures from many different sources,” said NCSL Executive Director William Pound. “In addition to rising costs of health care and education, the federal government is adding to the burden by attempting to export its own deficit to the states. NCSL has identified $50 billion in cost shifts in the FY 2006 federal budget.”
States have, for the most part, managed to weather the fiscal storm without raising taxes. Actions taken in 2005 that will affect FY 2006 revenues will result in a net tax increase of $2.6 billion. States raised fees to bring in an expected $769 million as well. Of the 42 states reporting tax information, three cut taxes: Idaho, Iowa and Virginia. Eight states raised taxes by more than 1 percent: Kentucky, Maryland, Minnesota, New Hampshire, New York, Ohio, Rhode Island and Washington.
In a reversal from last year’s $1.1 billion increase, states imposed a net cut of $330 million in personal income taxes. While six states raised personal income taxes, 14 cut them. Corporate income taxes increased by $617 million, up from $180 million last year. Twenty states changed their corporate business taxes, increasing them in 13 and reducing them in seven. States boosted sales and use taxes by $863 million, and new cigarette and tobacco tax increases will generate $1.1 billion.
This report is preliminary. NCSL will release a final report this winter.
For a copy of State Budget & Tax Actions 2005: Preliminary Report, send an email to press-room@ncsl.org. Copies are free to credentialed members of the media. Others can purchase at NCSL’s book store, www.ncsl.org/bookstore.
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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