No red ink showing on state ledgers

After weathering the rockiest budget conditions since World War II earlier this decade, states appear to be well on the road to economic recovery and fiscal stability, according to a report available April 10 from the National Conference of State Legislatures.

Because of stronger than expected state tax collections, 42 states will end fiscal year 2006 on June 30 with an estimated total surplus of $28.9 billion, equal to about 5 percent of all state general fund budgets.

However, the report also reflected growing concern among state lawmakers that ongoing state revenues will not keep pace with state spending growth in programs such as Medicaid, leading to deficits in upcoming years. 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.

“The fact that states predict they’ll end the year with balances does not mean that their finances are stable in the long term in every case,” NCSL Executive Director Bill Pound said in a written statement.

Below Stateline.org summarizes highlights from the 50-state report, including which areas of state revenue are performing best, how states plan to spend a collective $28.9 billion surplus and what budget pitfalls loom in states’ fiscal futures.

The report is based on a survey of legislative fiscal directors in all 50 states conducted in March. 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.

Revenue performance

Nearly every state reported to NCSL that all sources of state revenue were performing strongly in fiscal 2006.

• Thirty-eight states have revised upward the amount of state revenue they expect to collect before the end of fiscal 2006. Six states reported revenue increases 10 percent or more above targets. Alaska reported the largest increase — $1.3 billion, or 50 percent – because of a surge in energy taxes. New Mexico, Texas and Wyoming also benefited from record energy tax collections.

• Three states — Indiana, Wisconsin and New Mexico — had to reduce their revenue forecasts. However, the reductions were less than 1 percent in Indiana and Wisconsin.

• Of the 41 states with revised revenue forecasts: 18 reported that tax collections continue to exceed expectations; 18 states reported revenues on target; and only South Dakota fell below its target by 1 percent.

• Eight states reported that revenue collections have exceeded targets in every major tax category — sales and use, personal income and corporate income. They are: Arizona, Arkansas, Delaware, Florida, Georgia, Idaho, North Dakota, and Washington. Another eight reported that collections were on or slightly above target.

• Corporate business taxes exceeded expectations the most. Kentucky corporate income taxes collections were 98 percent above estimates, Nebraska’s by 56 percent and Oklahoma’s by 38 percent.

• Personal income taxes were up in most states. Oklahoma and North Carolina reported personal income taxes were up by 5 percent and Oklahoma by 8 percent. Three states — Minnesota, Ohio and Rhode Island — reported that personal income tax collections were below forecast.

• Gaming or lottery revenues were up in Maryland, Nevada and Rhode Island. Gaming revenues were below forecast in Mississippi despite revising expectations after Hurricane Katrina.

Budget surpluses

Forty-two states expect to end fiscal 2006 with budget surpluses. The size of state budget surpluses ranged from 1 percent of the general budget in five states to 10 percent or more of the general budget in nine states. The total amount of revenue exceeding state budget forecasts is $28.9 billion, or about 5 percent of all states’ general fund budgets.

States plan to use the money to boost funding in some areas, to cut taxes or to deposit the money in rainy day funds to guard against future shortfalls.

• Of the states that planned to spend the surplus funds: 14 reported they would boost funding for higher education; 11 planned to invest in capital expenditures; seven planned to spend extra dollars on transportation projects; five states planned to boost state employee salary and benefits; and seven states planned to shore-up state pension liabilities.

• Thirteen states expected to provide some kind of tax relief. Income-tax reductions are being considered in Alabama, Hawaii, Oklahoma and South Carolina. Property tax relief is being considered in Maine, South Carolina and Texas. Wyoming already used surplus funds to eliminate the sales tax on food for the next two fiscal years. Oregon will return about $666 million of its $785 million projected surplus through personal and corporate income tax cuts as required by law.

• Nine states plan to deposit all or portions of their surplus into rainy day funds. Idaho expects to save $70 million; Pennsylvania plans to deposit $68 million — 25 percent — of its surplus into its rainy day fund, as required by law; and Utah plans to deposit $25 million.

Spending Overruns

Despite surging state revenues, 19 states still reported spending overruns in programs such as Medicaid, corrections and energy assistance for the poor. However, states reported the cost overruns were modest and could be covered with existing resources.

• Medicaid, the state-federal insurance program for the poor, continues to be the program most often over budget. Nine states reported Medicaid cost overruns. Maryland reported $237 million shortfall for Medicaid. Colorado, however, reported lower than anticipated Medicaid spending.

• Seven states reported that corrections spending outpaced appropriations, and four states reported that spending on courts and public-defender programs were over budget. Maryland reported its juvenile-justice program over budget.

• Five states reported that state energy costs and funding for low-income energy assistance were over budget.

• Three states reported education spending shortfalls: Arizona and Hawaii reported overspending in K-12 education; Ohio reported a $30 million overrun in higher education because of higher-than-expected enrollment.

• Alaska, Nevada and New Mexico reported children’s services spending over budget, and Pennsylvania and Washington reported overspending of federal Temporary Assistance to Needy Families funds.

• Massachusetts reported overspending for snow and ice removal.

Long-term structural deficits

While only three states ran behind their revenue forecasts and had 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.

• Vermont reported that current spending is increasing by 6 percent, while forecasted revenues will increase only 4 percent. Maryland spending is growing at 11 percent, while revenue growth is projected at less than 6 percent. Maryland officials project a structural deficit of $200 million in fiscal 2007, increasing to nearly $1 billion by fiscal 2011.

• Spending in Medicaid and other health care programs, K-12 education and corrections are most likely to outpace revenue growth and cause structural imbalances.

• Colorado reported that passage of a referendum to temporarily suspend a constitutional state spending cap has eliminated its structural deficit.

• Utah reported that state lawmakers have tried to use one-time revenues for one-time projects in an attempt to avoid structural deficits.