Stateline Story

Is The Party over? Report Shows State Revenue Growth Slowing

National Governors Association Executive Director Ray Scheppach has been worried about reports of economic problems starting to crop up in the states for some time. This week he found evidence that those reports are more than anecdotal. In a survey conducted August through November and a more current ad hoc survey of state budget officers, it's clear that the days of robust growth may be over, at least in some states.

"We know that most states are seeing their fiscal position deteriorate. Until we know whether there will be a hard or a soft economic landing we will not know how bad it will get," Scheppach said.

About half the states responding to the survey of the states, conducted jointly by the NGA and the National Association of State Budget Officers (NASBO), assume that general fund revenue growth for the next fiscal year (2002) will be lower than current year estimates. The new fiscal year begins July 1 in all but four states.

The lower forecasts are for state tax revenue from such sources as individual income, corporate and sales taxes.

Stacey Mazer, acting director of NASBO, says a softening in state sales tax revenues first became evident "several months ago" and has continued through the late fall.

Earlier this month the Federal Reserve survey of regional economic conditions also showed growth slowing, particularly in the industrial Midwest.

States have been socking away surpluses in rainy day funds to cushion any downturn. With year-end balances running at 6.2 percent for the current fiscal year, according to the report, there is money in the bank to help prevent major disruptions in state services to their citizens.

After the Fiscal Survey of the 50 states was completed, another less formal canvass was undertaken to determine if widespread reports of actual revenue shortfalls were accurate. In about half the 29 states that responded the decline isn't large, only about one per cent overall, but it is considerably more in some states.

The chief villain appears to be the growth of Medicaid. It now represents, on average, twenty per cent of state budgets. It's already exceeding current year budgets in more than half the states and the outlook is for double-digit growth. Driving the higher costs are prescription drug prices, and expanded enrollment, according to Mazer.

The report notes that the combination of an explosive surge in medicaid costs combined with lower revenue growth, "will reduce the ability of governors to meet their high priority needs while continuing to balance their budgets."

For the first time the fiscal survey tracked spending on information technology. States have rapidly moved to expand their online presence from the 'brochureware' that characterized most sites in the early phases of their development, to interactive sites that provide citizens with a vast array of state services. Everything from license renewals, to tax payments to state park reservations, are moving quickly to the World Wide Web. The report notes information technology expenditures average $185 million in the 30 states that provided information.

The full report may be downloaded from the NASBO Web site http://nasbo.org/pubs/pubslev1.htm