State Budget Picture Shows Modest Improvement

Tax collections are up for most states, but growing health care costs will make it tough for most states to balance their books. Thirty-two states expect to end fiscal 2004 with a modest surplus, but 33 states expect to have budget gaps for fiscal 2005, according to a new report released April 28 from the National Conference of State Legislatures, a bipartisan organization.

The report comes at a time when most states are struggling to craft final budgets that take effect July 1 for all but four states and as state lawmakers converge in Washington, D.C., to attend the NCSL spring meeting.

Many states appear to be treading water after three years of drowning in red ink. The number of states facing deficits in fiscal 2005 is about the same as the previous year, but the amount of money states will have to find to balance their books is considerably less. Thirty-three states face a shortfall of $36 billion, nearly half of the previous year's gap of $68.5 billion. And a big chunk of the fiscal 2005 budget gap comes from California, which alone faces a $15 billion gap.

The good news for states is that the amount of money they are collecting from taxes is more than they had figured. In 18 states, personal income tax collections are above estimates. Sales tax collections are higher in 22 states and more than half of the states report the corporate income tax is exceeding targets, NCSL said.

Eight states report that all major taxes are performing above expectations: Alabama, Delaware, Florida, Iowa, Maryland, New Jersey, Oklahoma and Tennessee.

Missouri, for example, went from thinking it might have a $1 billion deficit in fiscal 2005 to possibly having a $24 million surplus.

Although the magnitude of state fiscal problems has eased, state policymakers remain wary about the future, NCSL said. Most states already have cut programs and have depleted reserves. State officials not only are worried about growing health care costs, but also face "pent-up spending needs" from programs that were cut in the previous year to balance the budget. Twenty-eight states report that spending is exceeding budgeted levels and more than half point to health care and Medicaid as the chief culprit. Medicaid spending in Maine, for example, was running $135 million ahead of budget, and K-12 education is over budget in Montana by $7.9 million.

One fiscal officer expressed cautious optimism when he told NCSL: "We think we've hit bottom on the economy. Now we're hoping to turn the corner."