Stable Revenues, But Declining Optimism

States will begin 2007 on firm financial ground, but none are banking on $1 billion surpluses that some states unexpectedly enjoyed in 2006.

“State fiscal conditions are solid now, but they’re not as good as they were a year ago” at this time, said Corina Eckl, director of fiscal affairs for the National Conference of State Legislatures.

Many states are upbeat about their revenue outlook for the remainder of this fiscal year, which ends June 30 for all but four states . But looming health care, homeland security and other costs have tempered states’ positive outlook compared to a year ago, according to a Dec. 7 report by NCSL. Sixteen states told NCSL they are “optimistic” about revenues for the rest of the fiscal year, compared to 22 the previous year .

The report is based on a survey of legislative fiscal directors in all 50 states conducted in November. The nation’s governors and budget directors are expected to release a budget report next week that looks at state spending, revenue and year-end balances.

During 2006 state lawmakers enjoyed their best budget climate in six years, splurging on new projects ranging from a baseball stadium for the Minnesota Twins to a spaceport in New Mexico. States had weathered a severe economic downturn that forced states to close $264 billion in budget gaps over five years beginning in 2001 .

States also used their unexpected revenue in 2006 to boost funding for education, health care and capital projects. “Yes, revenues are performing strongly, but states have been trying to do some makeup spending for all those lean years,” Eckl said. At least 26 states put the extra money into reserve funds, she explained.

Fourteen states told NCSL they anticipate spending overruns for certain services before the current fiscal year ends on June 30. In recent years, Medicaid, the state-federal insurance program for the poor, had been the program most often over-budget, but this year that distinction goes to prisons. Eight states face overruns for items such as overtime and inmate health care. Five states — Iowa, Kansas, Maryland, Maine, and Oregon — anticipate a shortage of funds for Medicaid.

Twenty-three states are raking in more revenue than anticipated and 22 report revenue collections are on target for this time of the year, according to NCSL’s latest figures. Only Maryland, Michigan and Tennessee are below estimates.

But one worrisome indicator is reduced sales tax revenue. Fourteen states showed signs of weakness in this area when the survey was taken in November. The sales tax accounts for about one-third of state collections.

“The sales tax is showing signs of weaknesses in many states,” Texas state Sen. Leticia Van De Putte (D), the NCSL president, said in a statement. “We hope the holiday gift-giving season puts that category back on target and its underperformance isn’t a sign of trouble ahead.”

NCSL asked state budget officers to predict the top three fiscal issues their states will face in the 2007 legislative session. Education topped the list – it is expected to dominate discussions in at least 29 statehouses. Health care and Medicaid will also be major issues of debate in at least 23 states, according to NCSL.

The report also outlines some of the spending plans states will consider during their 2007 legislative sessions. These include:

• Education : Indiana lawmakers are expected to consider funding for full-day kindergarten while South Dakota looks at computer upgrades in kindergarten through 12 ^th grade schools. Montana, New Hampshire and New York are among states grappling with court orders to revamp how they fund education.
• Health care : Delaware lawmakers are expected to examine subsidized health insurance for small employers, and West Virginia is expected to consider public employee health insurance.
• Taxes : States such as Connecticut, Florida, Idaho, Indiana and Minnesota plan to tackle property tax relief. Arkansas and Idaho are likely to consider cutting sales taxes for grocery purchases while Oregon is expected to consider hiking taxes on cigarettes, beer and wine.
• Prisons : Alabama, California, Idaho, Kansas, Nevada, North Dakota, Oklahoma and Texas are among the states expected to make prison reform a top priority.
• Retiree benefits: Alaska, Illinois, Montana, Nevada and New Hampshire are among states planning to focus on the costs of future health care and pension benefits for state retirees.
• Transportation: Delaware, Maine, New Mexico, Pennsylvania, South Carolina, Vermont and Virginia are expected to concentrate on improving highway, bridge and mass transit systems.

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