Last winter, the National Governors Association (NGA) said states were mired in their worst budget crisis since World War II.
Now, the NGA says the crisis is easing.
"I do believe states have in fact bottomed-out and the crisis is easing somewhat," said Ray Scheppach, executive director of the NGA, an organization that represents the governors' interests in Washington, D.C. "I'm optimistic that within a quarter or two we're going to see more moderate revenue growth."
Scheppach delivered his remarks at a Dec. 4 news conference announcing the release of a new report The Fiscal Survey of the States compiled biannually by the NGA and the National Association of State Budget Officers (NASBO). The report lands at a time when the national economy is emerging from a nearly three-year slump and many states are reaping the benefits.
Arkansas, for example, reported this week that revenues grew 8.9 percent, or $26 million, in November over the same month last year. Since July, Arkansas revenues have increased 5 percent over the previous year.
The new NGA-NASBO report reveals a state fiscal landscape pockmarked with problem areas despite the improved outlook for states and the economy.
"States have done a lot of one-time cuts, they've got under-funded pensions, they've borrowed money from trust funds, they've securitized tobacco (settlements) and they've moved payroll dates around. There's going to be some backfilling on that hole," Scheppach said.
Indeed, the overall hole from which states are emerging is a deep one. State general fund spending grew 0.6 percent in fiscal year 2003 and 0.2 percent in fiscal 2004, a marked departure from states' average annual growth rate of 6.2 percent, according to the report.
"This is the smallest nominal general fund increase since 1979. It's unprecedented to have close to three years of nearly flat spending, but that's what we're finding in the survey," said Scott Pattison, NASBO's executive director and a former Virginia budget director.
The numbers look worse when the eroding effects of inflation are factored in, with state budgets shrinking by 1.6 percent in fiscal 2003 and 2 percent in fiscal 2004, the report finds.
This has resulted in widespread budgets cuts and tax and fee increases in the states.
Eighteen states raised taxes by nearly $6.2 billion for fiscal year 2004, according to another report released yesterday The 2003 Tax and Budget Review by the Rockefeller Institute of Government at the State University of New York, Albany.
This is in addition to at least $2.6 billion in tax and fee increases in the states, which is many times more than states have ever before raised fees.
"This shift toward fee increases appears to result from states shying away from more tax increases, while still needing new revenue to close budget gaps," the Rockefeller report said.
On the spending side, states found savings in a variety of places. Sixteen states laid-off employees, 13 used early retirement to pare their work forces and 13 reorganized programs to find cost-savings, according to the NASBO-NGA report.
Looking ahead, NGA's Scheppach said state revenue growth will remain sluggish until states realign their tax systems, many of which were last overhauled in the 1950s, to match modern economic realities.
"The long-run structural problem is still there," Scheppach said. "They still have obsolete tax systems built for a manufacturing economy, and not tax systems that are aligned with a high-technology, service-oriented, deregulated, international economy."
Virginia Gov. Mark Warner, a Democrat, recently proposed overhauling his state's tax code, but Scheppach said tax reform efforts are a tough sell.
"The politics around tax reform are so difficult that people tend to shy away," he said.