Economic Slump Has States Tightening Belts

The slowing national economy has many states facing budget deficits and shrinking account balances for the first time since the early 1990’s, according to a report released this week by the National Conference of State Legislatures.

NCSL surveyed the 46 states that have passed budgets for fiscal year 2002 — which began July 1 for all but four states — and found that 20 states took “extraordinary actions” to pass balanced ones.

A few examples: Wisconsin sold $5.9 billion in future tobacco settlement money for $1.3 billion now and used $450 million of that to balance its budget; Indiana repealed a personal property tax credit and delayed implementation of another credit to save $118.9 million; and ten states cut spending.

“State legislatures gave the green light to funding new programs, enacting tax cuts and building rainy day funds in the 1990’s,” said Jim Costa, president of NCSL and a state senator from California. “The yellow light is on now and state legislatures will be more cautious in making budget decisions.”

To this point, states have been doing a little “belt tightening,” such as tapping rainy day and tobacco funds, implementing program cuts, freezing travel and increasing targeted taxes, says Costa. But should the economy worsen, some states may be forced to turn to more drastic fiscal measures, such as across the board tax increases.

Recent years found the states wrestling with budget surpluses. Much of this money went toward improvements in education and health care, with some tucked away in rainy day funds. According to the report, twenty-two states had budget surpluses last year.

But for the first time in nearly a decade, a large number of states brought in less money than they gave out. Revenue grew just 4.5 percent over the previous year, while spending grew 9.1 percent, driven mostly by rising Medicaid costs.

NCSL reports that seventeen states had to make mid-year adjustments to cover shortfalls in their fiscal year 2001 budgets. Nine of them enacted program cuts. Six tapped rainy day funds. Four cancelled or delayed major projects.

Still, the states managed to find the money to enact a net tax cut for the seventh consecutive year, although the 2001 tax reduction of $1.8 billion is much smaller than last year’s record $9.9 billion cut.

The four states that didn’t report to NCSL are Massachusetts, New York, North Carolina and Tennessee. They are still wrangling over budget details for the new fiscal year. North Carolina is in particular trouble as it faces a deficit in the hundreds of millions and a tax standoff between Republicans and Democrats. Tennessee’s governor recently vetoed the legislature’s budget, which was balanced with tobacco settlement money.