26 States Forced to Close Budget Gaps

State revenues are surpassing predictions, but many states still are feeling the pinch from expanding Medicaid costs and the lingering effects of the early decade’s fiscal crisis. So balancing state budgets is a struggle again this year, according to the most recent figures from the National Conference of State Legislatures.

The April 14 report, which includes state-by-state budget data, comes as most states are in the midst of crafting new budgets that take effect July 1 in all but four states and as state lawmakers gather in Washington, D.C., for NCSL’s spring meeting.

Although state economies are rebuilding after the 2001 technology bust and nationwide recession, 26 states faced fiscal 2006 budget gaps, according to the report. Year-after-year disparity between costs and revenues is fueling concerns in nearly half the states that a longer-term structural budget gap — in which ongoing revenue can’t match ongoing expenses — has been created. Some states, such as Nevada and Virginia, recently enacted tax packages designed to combat eroding tax bases and correct the imbalance.

According to the report, 23 states so far this fiscal year collected more revenue than predicted in every major tax category — sales and use, personal income and corporate income. But the report cautions that higher-than-expected collections aren’t necessarily a sign that robust economic times have returned; revenues might be higher than states predicted simply because they made conservative estimates or started from a low revenue base set in lean times.

Still, only three states — Michigan, Nebraska and New Hampshire — had to scramble to plug deficits in their current fiscal 2005 budgets this legislative session, compared to 10 states last year and 31 two years ago.

Thirty-one states report fiscal 2005 spending overruns for some portion of their budgets, 23 states in the area of Medicaid and health care.

“States are barely keeping their heads above the rising tide of new costs,” Maryland Del. John Hurson (D), NCSL’s president, said in a news release. “Medicaid and other health care expenses, in addition to demands from corrections, state parks, employee health insurance and K-12 education are making it tough for states to do anything but tread water.”

In addition to new costs, pent-up demand for spending on projects such as road and building maintenance also is contributing to budget pressures on states. Many projects were delayed since 2001 as a way to help states close a $235 billion budget gap.

The federal government also has added to states’ spending burdens, NCSL says. The group recently identified $30 billion in costs — the largest slice of which comes from education initiatives such as President Bush’s signature No Child Left Behind law — that the federal government is set to foist on states in the proposed fiscal 2006 federal budget.