Stateline Story

Healthier Budgets for States in 2005

States finally can breathe a sigh of relief as the budget squeeze of the past four years appears to have eased, but skyrocketing health care costs still could derail states' fiscal recovery, according to a new report from the nation's governors and state budget experts.

Most states had more money in their coffers and fewer had to rely on tax hikes in balancing state budgets for fiscal 2005, which began July 1 for most states, according to "The Fiscal Survey of States" released Dec. 16 by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

It's not quite the heady 1990s when states were flush with cash, but the flow of money into state treasuries in fiscal 2004 exceeded projections albeit narrowly in nearly every state.

Burgeoning health care costs, however, will eat a bigger portion of state budgets than in years past. As NGA/NASBO had predicted this fall, state spending on Medicaid the health safety-net program for 52 million poor and disabled for the first time has surpassed spending on elementary and secondary education. Medicaid made up 21.9 percent of total state spending in fiscal 2004, edging out K-12's 21.5 percent of the state spending pie. This pot of money includes revenues from the federal government.

"Medicaid is now trumping education and will continue to do so," NGA Executive Director Raymond C. Scheppach said at a joint NGA/NASBO Washington, D.C., press conference. Scheppach said state policymakers will be forced to make the decision between funding health care and education, "but not both" and predicted higher education would be on the chopping block.

NASBO Executive Director Scott Pattison added, "The bottom line is that the pressure from Medicaid and other skyrocketing health care costs makes it difficult for states to completly recover from thes difficult fiscal times."

The governors' and budget directors' report echoes sentiments of state fiscal experts who told the National Conference of State Legislatures this month that health care would top many statehouse agendas in the coming year.

Most state legislatures will reconvene in January and begin making their budgets for fiscal 2006, which begins July 1 for all but four states (Alabama, Michigan, New York and Texas). The NGA/NASBO report reflects actual fiscal 2003 data, preliminary data from fiscal 2004 and budget appropriations for fiscal 2005.

After states' worst fiscal crisis in six decades hit with the recession in 2001, state lawmakers for the past four years not only had to worry about writing balanced budgets but closing deficits that yawned mid-year. States reeled from the 2001 recession because the downturn cost people jobs and the high-tech crash brought sharp declines in stock market values, both resulting in fewer taxes for states.

In fiscal 2004, only 15 states had to go back and make cuts midway through the budget year, compared to fiscal 2002 when 40 states were in that boat. Only four states have cut their current fiscal 2005 budgets.

Fewer states in fiscal 2005 had to rely on raising taxes to balance their budgets. Nearly half the states (24) enacted tax and fee changes for fiscal 2005, bringing in $3.5 billion, compared to 36 states that went that route in fiscal 2004 to raise an extra $9.6 billion. Some examples:

  • Cigarette and tobacco taxes in 10 states Alabama, Alaska, Arkansas, Michigan, Nevada, New Jersey, New York, Oklahoma, Rhode Island and Virginia brought in $888.4 million. 
  • Sales tax increases in seven states Alabama, California, Illinois, New Mexico, New York, Rhode Island and Virginia boosted coffers by $710 million. 
  • Personal income taxes increases in nine states Arizona, California, Connecticut, Illinois, Maryland, Massachusetts, New Mexico, Rhode Island and Virginia netted $428.5 million. 
  • Corporate income taxes went up in seven states Illinois, Maryland, Massachusetts, New Jersey, New York, Rhode Island and Virginia, yielding $272 million.

A separate report released Dec. 15 calculated that state tax collections grew 4.3 percent from July through September, the fourth straight quarter of real adjusted growth after nine straight quarters of decline, according to the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.

"Building on a strong prior fiscal year for state revenues, states can now face with confidence the budget cycle that is just starting," Nicholas Jenny, an analyst at the institute said in a prepared statement.