42 states foresee a surplus this fiscal year

Forty-two states project to end this fiscal year with a surplus totaling $28.9 billion, making it easier to balance budgets and reinvest in programs cut during the fiscal downturn in the first half of this decade, according to a report available April 10 from the National Conference of State Legislatures.

After weathering years of budget shortfalls between fiscal years 2001 and 2005 when states fell more than $265 billion in the red, state revenues soared beyond expectations in 38 states this fiscal year, which ends June 30 for all but four states.

Only Indiana, New Mexico and Wisconsin have had to reduce their revenue projections midway through the fiscal year, NCSL reported. Among states that have revised their revenue forecasts since the beginning of fiscal 2006, tax collections still are exceeding expectations in 18 states, on target in another 18 and below forecasted levels only in South Dakota.

After years of cost-cutting, legislatures are likely to invest much of the surplus in programs neglected during the hard times. Higher education, transportation, construction and roads are expected to be the main beneficiaries nationally, the report said. But states also are using the surplus to shore up state pensions, cut taxes and invest in rainy day funds.

The report comes as most states are in the midst of crafting new state budgets for fiscal 2007 that take effect July 1. The findings were presented at NCSL’s annual spring meeting in Washington, D.C., last week, but the written report wasn’t made available until Monday, April 10.

“This news is good, but it’s not the whole story. Spending pressures continue to mount for states, and the federal government continues to impose unprecedented unfunded mandates on states,” Illinois state Sen. Steve Rauschenberger (R), NCSL’s president, said in a written statement.

Despite surging state revenues, 19 states still reported spending overruns in programs such as Medicaid, corrections and energy assistance for the poor. Medicaid, the state-federal insurance program for the poor, in recent years has eclipsed elementary and secondary education as the largest chunk of state budgets, when federal dollars spent by states are factored in.

In an NCSL session Friday with former Utah Gov. Mike Leavitt, the U.S. secretary of health and human services, state lawmakers were encouraged to take advantage of the flexibility Congress gave states in Medicaid earlier this year.

Leavitt noted that the federal budget-cutting package approved in February lets states change the benefit packages they offer to Medicaid recipients, impose fees and co-payments for certain services, use plans based on health savings accounts and encourage seniors to get treatment at home rather than at nursing homes. Leavitt said he would be open to other ideas states proposed.

“I’m telling you today if you’ll bring to me an idea that covers more people, more efficiently in a budget-neutral way – which is what all of you are looking for – you’ll have a ready partner here. I’m looking for ideas of innovation,” he said.

In the survey of state legislative fiscal directors conducted at the end of March, eight states reported that revenue collections have exceeded targets in every major tax category — sales and use, personal income and corporate income. Another eight reported that collections were on or slightly above target

“These are the best financial conditions I’ve seen in my 16 years in office,” said North Dakota state Rep. Ken Svedjan (R).

South Dakota, which recently approved a 3 percent across-the-board raise for state employees, has raised its revenue projections by $20 million two times this year.

“We’ve just had extraordinary growth, and our economy keeps exceeding our expectations,” said South Dakota state Rep. Deb Peters (R).

Even in Gulf Coast states ravaged by Hurricane Katrina last summerl, revenue estimates have been revised upward, mostly because of massive reconstruction investments.

“We do have revenues exceeding projections, but what we’re seeing is that post-disaster boom. It’s not the way you want to see a boom created, I can assure you that,” said Max Arinder, executive director of a Mississippi joint legislative committee on state spending.

Taxpayers and businesses will benefit, too. In Oregon, state lawmakers can’t use the extra revenue because state law requires the government to return most of it. At the end of fiscal year 2007, when Oregon finishes its two-year budget, the state must give back an estimated $666 million out of $785 million in surplus, according to NCSL.

While only three states are running behind their revenue forecasts and might have to make adjustments to stay in the black this fiscal year, the longer-term outlook is still a concern. According to the NCSL survey, expenses will exceed revenues in 10 states in fiscal 2007 – and 19 states in fiscal 2008 — if spending and collections increase at their current pace.

Still, “it’s promising considering what we saw two to three years ago,” said Corina Eckl, fiscal affairs director at NCSL.

Free copies of the NCSL survey can be requested by state lawmakers and credentialed media by emailing [email protected] . Others can purchase a copy for $30 at www.ncsl.org/bookstore.