Stateline Story

States Caught in Fiscal Storm, NCSL Says

historic budget crisis in the states is getting worse by the day and shows no signs of letting up anytime soon, according to a report released Tuesday by the National Conference of State Legislatures.

Collectively, states face budget deficits approaching $26 billion in the current fiscal year, which ends June 30 for most states. This is an increase of $8.5 billion over what states were facing when NCSL released its last fiscal report in November.

Next year looks worse, with states reporting an estimated $68.5 billion in shortfalls. This figure could grow even larger, as one-third of the states were unable to provide NCSL with data for the fiscal year that begins July 1.

"State budgets are under siege. The faltering national economy, declines in the stock market, contractions in the manufacturing and high-tech sectors and soaring healthcare costs have combined to undermine the stability of state budgets," said Oklahoma state Sen. Angela Monson, president of NCSL.

A veteran state lawmaker, Monson said state governments are accustomed to riding the ups and downs of the economy, but that this is the worst fiscal climate she has experienced during her many years of working in state government.

"I've been around the state Capitol in Oklahoma about 21 years as a staffer and as a number cruncher and I have not seen anything like it," said Monson.

Exceptions include states like Wyoming and North Dakota, which typically run on a different economic cycle than the rest of the country.

"States that have a natural resource-based economy have fared better in this economic downturn relative to some of the other states," said Corina Eckl, fiscal analyst for the NCSL.

A major cause of most states' budget problems is a slump in revenues. According NCSL, at least 30 states say revenues are coming in below estimates, with 12 of these reporting collections below estimates that had already been revised downward earlier in the year.

Typically high-income states, such as California, Connecticut and Massachusetts, are facing some of the biggest losses in revenue. The stock market, which flooded these states with dollars from capital gains taxes during the 1990's, has since turned bearish and is leaving them starved for cash.

Many states are also facing pressure on the spending side, as the struggling economy sends more and more people to the unemployment rolls and Medicaid, a state-federal program that provides health coverage to the poor. NCSL reports that spending on all programs is exceeding budgeted levels in 37 states, with 32 of these claiming that Medicaid and healthcare costs are especially problematic.

Monson said state legislators are also concerned about what she calls a "new era" of unfunded mandates being handed down by the federal government.

By NCSL's count, these unfunded mandates reach upwards of $25 billion, and include funding shortfalls in educational testing, which is mandated by the federal No Child Left Behind act, special education, election reform and homeland security.

"The Federal government has required that we do certain things and I think it's incumbent upon them to provide the financial resources to meet those demands," said Monson. She added that the Bush Administration's recently released budget plan does not address state legislators' funding concerns.

To close their budget gaps, states are enacting major program cuts and proposing significant tax increases.

Twenty-nine states have imposed across-the-board cuts, slashing all state programs equally, according to NCSL. Thirteen states have cut spending on Medicaid. Twelve have cut higher education spending. Nine states have cut elementary and secondary education spending.

At least 24 states are looking at tax increases to forestall additional program cuts, reported the NCSL.

Additionally, lawmakers in a handful of states, such as Arkansas, Nevada and South Carolina, are considering large-scale reorganizations of government operations and programs to save money. Others, such as Virginia, are looking to reap savings from streamlining state purchasing of goods and services.

Such government reform efforts are one positive byproduct of the states' fiscal crisis, said Monson.

"We create efficiencies. We better crystallize our priorities, our goals, our objectives. We determine what government really should look like, and how to provide services better," she said.

This window of opportunity doesn't appear to be closing anytime soon. For as stormy as current state fiscal conditions have been over the past couple of years, budget forecasters are predicting more of the same.

"For three consecutive years, most states have faced growing budget problems," said Monson. "There is no immediate end in sight."