State finances showing steady signs of health

Wednesday, April 28, 2004

States are steadily moving toward financial health, a new survey found, with nearly two-thirds expecting to finish the current fiscal year in the black. That's the best showing since the economy took a turn for the worse four years ago.

Stronger revenue is driving the trend, the National Conference of State Legislatures found in its new report. Eighteen states reported personal income taxes exceeding expectations, more than half said corporate taxes were coming in higher than budgeted, and 22 states were seeing stronger-than-expected sales taxes.

Financial experts warned, however, that pressures remain. State leaders face demands to boost spending for programs that were pared back during the past few years. Also, many states are seeing only modest growth.

"We may have sort of turned the corner here," said Gary Olson, director of the nonpartisan Senate Fiscal Agency in Michigan, where the state lost 20 percent of its revenue base over the last four years. "It means a lot. Things are not getting worse."

The NCSL surveyed all 50 states to gauge their economic health, as most are nearing the end of their fiscal year. For all but four states, the fiscal year ends in June.

Overall, the conference's good news outweighed the bad:

An aggregate shortfall of $5.3 billion spread across 20 states has been almost entirely closed.

Thirty-two states project surpluses by the end of June; though most are small, five of those states project surpluses greater than 5 percent of the total budget.

While budget gaps remain a worry for next year, at least 12 states project surpluses in the fiscal year that begins in July. Thirty-three, however, are trying to resolve estimated shortfalls.

"This is just good news. It's a turnaround. We are beyond the worst of it," said Corina Eckl, NCSL's senior fiscal analyst. "But that doesn't mean we're in the clear. ... There are still a lot of challenges."

States have relied much more heavily on spending cuts than on tax increases to get through the tough times. If states had relied on tax increases to the same extent as they did in the early '90s downturn, Eckl said, taxes would've risen by $30 billion last year. Instead, taxes and fees went up roughly $13 billion, she said.

Some have said the reliance on cuts is eroding the states' ability to provide for its citizens, particularly the neediest -- elderly, children and the poor.

The Center for Budget and Policy Priorities, a Washington think tank that focuses on policies that affect the poor, found that state spending, viewed as a percentage of the national economy, has fallen to its lowest level in more than a decade.

And the NCSL report said that Medicaid and other health care programs continued to play a significant part in spending overruns, which were reported in 28 states this fiscal year.

In Kansas, state Sen. Steve Morris -- chairman of the Senate's Ways and Means Committee -- said the improving numbers have helped the state meet challenges to hold the line for education and social services, though there are still holes to fill elsewhere.

"We're not cutting from current levels, but we're not able to add," said Morris, a Republican.

Still, Morris said the latest figures document an improving economy. He is rethinking his pessimistic view about budget troubles next year and the year after, he said.

"I'm optimistic that with the pickup in the economy, by the time we get to that point, we'll have more money and a little more flexibility," he said.

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On the Net:

National Conference of State Legislatures: http://www.ncsl.org

Center for Budget and Policy Priorities report:

http://www.cbpp.org/4-22-04sfp.htm

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