Stateline Story

Fewer States On Course to Meet Fiscal Targets

The National Conference of State Legislatures (NCSL) last month suddenly revised a mostly optimistic report on the fiscal condition of all 50 states after it recognized that tax receipts for November and December showed fewer states were on track to meet budget expectations.

The economies of several states have taken a turn for the worse, according to a revised report showing fewer budgets are on track to meet expectations.

Two months after it issued a mostly optimistic survey of the fiscal condition of all 50 states, the National Conference of State Legislatures (NCSL) went back to the drawing board, re-surveying state budget officers and incorporating uncounted November and December tax receipts.

In the March 8 revised report , fiscal officers for 31 states reported tax revenue collections were on target or above forecasted levels -- 11 fewer than had indicated in NCSL's Jan. 4 end-of-the-year publication that they were in good shape.

This rapid deceleration of state budget growth illustrates the rising concern among many that states are fiscally more vulnerable than previously thought, NCSL officials said.

Though reasons for the economic decline vary from state-to-state, health care, education and prison system costs are primarily to blame, NCSL President Jim Costa , a California senator, told reporters last week."We in the 50 states are reacting to obvious changes occurring in the economy," Costa said. " Revenue growth has slowed in the last two months and it's very clear to us that Medicaid expenses are taking a bite out of state expenditures."

In all, 23 states reported Medicaid cost overruns. NCSL Executive Director William T. Pound said while state legislatures as a group saw modest 4 percent increases in Medicaid over the last four years, many will be forced to accommodate an estimated 9 percent growth in the next several years.

"We're headed for a major problem on that," Pound said.

In examining the state-by-state fiscal trends, a regional pattern emerges. States showing strong revenue growth tend to be in the West (Arizona, California and Utah) and mid-Atlantic (Maryland, New York and Pennsylvania), while revenue shortfalls are cropping up mainly in the South (Alabama, Arkansas and Kentucky) and Great Lakes region (Indiana, Michigan and Ohio). Additionally, there is a regional divide in attitudes about how states will fare through the remaining months of the fiscal year. Western state officials tend to be optimistic, the report states, but their counterparts in the South are more apprehensive.

Corina Eckl, director of NCSL's Fiscal Affairs Program, said there is "a mixed bag" of reasons why southern states experienced slower collections. Since Tennessee does not tax personal income and collects 57 percent of its revenues through sales tax, its collection base is too narrow. Gov. Don Sundquist (R), however, recently proposed lowering the state sales tax rate but broadening the tax base at the same time to include services that now go untaxed. And in South Carolina, flood expenses, lawsuits and rising education costs have contributed to the state's fiscal deterioration.

In Alabama, Gov. Don Siegelman (D) ordered a 6.2 percent across-the-board cut in this year's $4.3 billion education budget because of revenue shortfalls. Known as the state's Education Trust Fund, it relies on a portion of sales and income tax collections. That order is being challenged, however, as a Supreme Court stay has temporarily blocked an Alabama judge's ruling to restore state funding for some areas of K-12. North Carolina also is facing broad cuts to create a $1 billion escrow account to deal with its $791 million shortfall. And in Mississippi, state budget officers are considering $137 million in cuts.

Eckls said in many of the Great Lakes states, problems arose because of states' reliance on the manufacturing industry -- primarily the slowing auto industry.

Overall, the growing number of states facing fiscal problems is causing alarm among many state budget officers. While 31 states reported that budget cuts would not be necessary to balance the fiscal 2001 budget, 11 states are likely to cut their current budgets. In some cases, states have been forced to deal with extreme measures to win their budget battles.

The NCSL survey further indicates that 10 states may resort to tax increases -- especially excise taxes -- though most will be minor. Louisiana is reviewing whether to impose higher levies on riverboat casinos to compensate teacher raises, and Maine Gov. Angus S. King (I) has proposed increases in the cigarette tax and the meals and lodging tax. Still, 18 states reported tax relief to be a possibility, while 22 states plan no changes in taxation.

But despite signs of a worsening economy, NCSL officials remain optimistic that many states will weather the downturn. Costa pointed out that because of years of a vibrant economy, states were able to boost their budget reserves. As a result, he said, 38 states will not have to tap their savings accounts, known as "Rainy Day Funds," compared to 11 states that indicated that some type of reserve would have to be used in the current fiscal year.

"That's good news," Costa said.