Stateline Story

Boom Time for State Finances

  • August 15, 2006
  • By Pamela Prah

NASHVILLE, Tenn. - State balance sheets are the best they've looked in decades. States closed their fiscal 2006 books with nearly 25 percent more money than the previous year, according to the National Conference of State Legislatures ' latest survey of states' fiscal conditions.

The extra revenue allowed 20 states to cut personal income taxes by $600 million; 24 states splurged more on K-12 education, and 25 states socked away more in their reserves for the current fiscal 2007 budget year, which for most states began July 1, NCSL said in a preliminary report released here Aug. 15 at the group's annual meeting.

In a surprise to some, education — not Medicaid — is expected to be the fastest-growing category of state spending in fiscal 2007, reversing a six-year trend. Corina Eckl, director of NCSL's fiscal affairs programs, said that "most states think that this is an aberration" because of recent Medicaid cost reforms and that she expects health care costs to continue to climb. "This is a temporary situation," she said.

General fund spending for K-12 education is budgeted to grow 7.9 percent while spending for both higher education and Medicaid is expected to grow 6.3 percent each, according to NCSL.

States ended fiscal 2006 with $57.1 billion in surpluses, up from $45.8 billion the previous year, NCSL said. That $57.1 billion figure represents 10.2 percent of states' general fund spending in fiscal 2006, the highest percentage in at least two decades except for 2000, when the balance also reached the 10 percent range.

States slowly have rebounded from the worst economic conditions since the Great Depression earlier this decade. States were forced to close $264 billion in budget gaps over five years beginning in 2001. For each of the past three years, states' economic fortunes have improved, but NCSL has continued to caution that the good times may not last long. The group's budget experts expect state spending to surpass money coming in to state coffers this fiscal year. State spending is projected to grow 7.6 percent while revenues are expected to grow only 3 percent.

"Legislative fiscal directors in many states worry that state spending will outpace ongoing revenue growth over the longer term, leading to structural deficits beginning as early as FY (fiscal year) 2008," NCSL said in its "State Budget and Tax Actions 2006" report. The group expects to publish a more detailed report later this year.

A rebounding economy helped provide states with the extra revenue. States also had more money than expected because many states were conservative last year in their budget forecasts, figuring it was better to underestimate projected revenues rather than be forced to cut later. States had estimated revenues to grow by 2.7 percent in fiscal 2006, but once the ledgers closed on the most recent fiscal year, the actual figure was 7.7 percent, NCSL said in its report, which includes budget data from 49 states and tax data from 44 states.

Here's how states doled out the extra money in fiscal 2007:

  • Rainy day funds - 18 states added to their rainy day accounts while a few others added to other types of reserve funds. Maryland put away $593 million, Connecticut $439.5 million and Georgia $430 million. Overall, rainy day funds grew by 23 percent during the past fiscal year.
  • Education - 24 states boosted K-12 education funding, with double-digit increases in Texas, Wyoming and Alabama. Twenty states put more money toward higher education, including hefty increases in Mississippi and Alabama.
  • Health care - 14 states spent more on Medicaid, the state-federal health care program that covers 59 million disabled or low-income children and adults, with the largest hikes in Wyoming, South Carolina and Montana.
  • Prisons - 11 states pumped more money into corrections, including Wyoming, which is building a new prison, followed by Minnesota and Arizona.
  • Projects - 14 states allocated money for capital projects, including Arizona, which is constructing a state archives building and crime lab; North Carolina, which is working on an emergency management operations center and a university genomics building; and New Mexico, which has targeted money to build a new spaceport.
  • Tax cuts - 20 states cut personal income taxes by nearly $600 million, including Arizona, which lowered income taxes by 5 percent, and Oklahoma, which expanded its standard deduction. Twenty-one states trimmed corporate and business taxes by $124 million, including Connecticut, which repealed its corporate income surtax.
  • Property tax relief — New Jersey, South Carolina and Texas reduced reliance on property taxes in favor of other revenue sources. Indiana, Kansas and Maryland provided targeted property-tax relief.
  • Cigarette tax hikes — New Jersey increased its cigarette tax by 17.5 cents per pack, Texas upped its tax by $1 and Vermont by 60 cents.