States Budget Squeeze Appears to Be Easing

Don't break out the Champagne quite yet, but for the first time in more than two years, most state budgets are in the black.

Only 10 states report budget gaps for the first quarter of fiscal 2004, compared with 31 states that had gaps this time last year, the National Conference of State Legislatures said in a new report Nov. 21.

"For wary policymakers, the lack of more bad news is good news," NCSL Executive Director Bill Pound said in a prepared statement. States have closed a cumulative $200 billion budget gap since fiscal year 2001, NCSL said.

The FY 2004 gaps range from less than 1 percent in Connecticut and Rhode Island to 14 percent in Alaska. The remaining seven states reporting budget gaps are: Indiana, Iowa, Kentucky, Michigan, Mississippi, Missouri and Nebraska.

The report is based on a survey of state legislative fiscal directors in November 2003. All but four states begin their fiscal year July 1.

Twenty-one states report that revenues are above their forecasts, compared to only three last year at this time and 24 states describe the revenue outlook as "stable."

But many states are still worried. Twenty-two states see spending overruns ahead. Thirteen report that Medicaid is already over budget, including Georgia, which is $173 million above estimates. Spending on prisons is exceeding budgeted levels in six states, including Mississippi, which faces a $60 million shortfall in corrections spending.

And 15 states are concerned about the revenue outlook for the remainder of the fiscal year. One state told NCSL: "We are very positive and the situation is getting better. But we're nowhere near good."

Another report suggesting that state budgets are getting healthier comes from the Rockefeller Institute of Government, the public policy arm of the State University of New York. The institute said Nov. 20 that state tax revenue grew by 4.5 percent in the July-September 2003 quarter compared to the year before.

While weak, this was the first real adjusted state tax revenue growth in more than two years, the institute said. "States will probably have to cut spending and/or raise taxes in order to balance the fiscal year 2005 budgets that they will begin to consider in few months," the institute said.

2005 may be a tough year, said Nick Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities, a Washington, D.C., think tank that focuses on policies affecting the poor. "It's safe to say that many states will get through fiscal 2004 okay, but the interesting question is what states will face in fiscal 2005," he said.

Even though revenues have stopped falling, revenue growth is modest, and many states have already used one-time measures to balance their budget in 2004, Johnson said. "There's going to be some real challenges to getting those '05 budgets into balance," he said.

Bill Ahern, spokesman for the Tax Foundation, a tax policy research group, credited the improved state budget situation to several factors. He said a combination of state spending cuts and the new U.S. economic growth figures of 7.2 percent taken together are a bigger factor in closing state budget cuts than the tax hikes that a few states implemented. "Tax hikes were not a major solver of the budget gap," he said.