Rising Revenue Turns States' Fiscal Tide in '05

The signs are promising—a $5.2 billion budget surplus projected in California, $1 billion in New York. In Wyoming, soaring oil and gas revenues are filling state coffers, and officials there anticipate a $1.8 billion surplus. 
Billion-dollar surpluses are welcome news for states after surviving an economic tailspin in 2001 that forced states over the next five years to close $264 billion in budget gaps.
From coast to coast, state revenues in recent months are performing better than expected, and signs abound that states' overall fiscal health is much improved. Still, experts caution against expecting a spending bonanza when legislators return in January to begin crafting their fiscal 2007 budgets.
"States are being cautious. Everybody remembers two, three, four years ago and how difficult it was. ... You can't assume that the revenue growth will continue to the same degree it has during the past year or so," said Scott Pattison, executive director of the National Association of State Budget Officers (NASBO).
Still, 2005 could go down as the year states finally emerged from one of the worst fiscal droughts in history. As the year progressed, the revenue news got brighter and brighter.
Revenues met or exceeded expectations in every state during fiscal 2005, according to a survey of state finances released Dec. 20 by the National Governors Association (NGA ) and NASBO. The 2005 fiscal year ended June 30 in all but four states.
With revenues swelling, fewer states were forced to go back and make mid-year cuts to their fiscal 2005 budgets than at the height of the fiscal crisis. Indiana, Michigan, New Jersey, New York and Ohio were the only ones forced to make mid-year cuts—totaling $890 million—to their fiscal 2005 budgets. Two of those states—Indiana and Michigan—also already have gone back and pared down their 2006 budgets.
That's a sharp contrast to 2002, when 37 states made $15 billion in mid-year budget cuts, according to the NGA/NASBO report.
Initial numbers for fiscal 2006 also offer signs that robust revenue collections continued in the first three months of the current fiscal year.
A Dec. 15 report from the National Conference of State Legislatures (NCSL ) indicates that Rhode Island is the only state where 2006 revenues so far have not met expectations. And Louisiana, where officials are reeling from Hurricanes Katrina and Rita, was the only state where officials reported pessimism about the revenue outlook for the remainder of the 2006 fiscal year. Louisiana officials expect to have a better handle in January on the storms' impact on revenues.
When legislators and governors early next year begin crafting their budgets for 2007, most states will be flush with cash -- the likes of which they haven't seen since before the onset of the 2001 nationwide economic downturn.
But years of budget cuts have created pent-up demand in a wide range of areas, from road improvement to school construction to corrections. States also are facing skyrocketing costs associated with Medicaid, the state-federal health insurance program for 52 million poor and disabled Americans.
Pattison of NASBO likened states' budget situation to a worker who receives a raise only to go home and discover his bills also have multiplied, and -- even with his raise - he can't pay them.
State revenues would have to grow by more than 9 percent a year until 2008 to restore state services to pre-recession levels, according to a Dec. 6 report from the Center on Budget and Policy Priorities , a Washington-based group that focuses on policies affecting the poor. That's much higher than the normal rate of state revenue growth, which averaged 5.6 percent a year from 1989 to 1999. State spending grew an average of 6.5 percent in 2005.
The NCSL report predicts that attempts to control Medicaid spending, which in many states has outpaced overall spending growth, will top the legislative agenda in 23 states. In Florida, where lawmakers earlier this month approved a two-county experimental program to place Medicaid patients in private managed-care plans, officials predict a continued emphasis on reducing the growth of the state's Medicaid budget.
In 2004 and 2005, about half the states registered Medicaid shortfalls totaling more than $5.9 billion, according to the NGA/NASBO report. Medicaid in 2004 eclipsed elementary and secondary education as the largest single portion of state budgets, when total state and federal dollars are considered.
In states such as Georgia, which absorbed 10,000 new students from the hurricane-ravaged Gulf region, officials predict funding for K-12 education will be a top fiscal issue in 2006. Reducing class sizes, boosting teacher salaries and paying for enrollment increases also will be on the agenda in states.
The NCSL report also names property-tax reform as a possibly popular 2006 issue in statehouses. After property taxes dominated the November governor's race in New Jersey, for example, Gov.-elect Jon Corzine (D) is considering an early 2006 special session to pass property-tax relief. Rising home values have recently inflated property tax burdens nationwide, and property-tax reform efforts are on the horizon in at least six other states in 2006.

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