Tough Economic Times Remain for States

As the fiscal year draws to a close, budget data released today by the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) indicate that states continue to struggle with declining revenues amidst an uncertain economy, with most states unable to protect their highest priority programs from budget reductions.

NGA Center for Best Practices

According to the latest Fiscal Survey of the States, based on state budget data collected during spring 2003 by NASBO, most governors chose spending reductions coupled with revenue increases and drawing down their remaining reserve funds to balance budgets amidst ongoing tight fiscal conditions.

Fiscal 2003, which will end June 30, was a grueling year for the majority of the nation’s governors. Thirty-seven states were forced to reduce already enacted budgets by nearly $14.5 billion – the largest spending cut in the history of the 27-year-old Fiscal Survey.

"In this report we find the fiscal condition in the states has not improved; balancing state budgets continues to be a difficult exercise," said Scott Pattison, NASBO’s executive director.

Governors in 29 states recommended tax and fee increases in fiscal 2004, resulting in a net increase of $17.5 billion – the largest since 1979. Furthermore, state spending growth was cut to only 0.3 percent in fiscal 2003 and is expected to decline 0.1 percent in fiscal 2004.

According to the survey, the strategy has remained the same in almost every state – across-the-board, targeted reductions to programs. Few states have succeeded in exempting high priority programs such as K-12 education, Medicaid, higher education, public safety, or aid to towns and cities.

"If economic conditions remain stagnant or worsen and if budget shortfalls continue next year. the states will have exhausted many of their options for countering a weak economy. The future of these programs, which represent the highest priorities for states, could be in greater jeopardy," said Pattison.

Facts from the survey indicate that governors used a wide variety of budget management tactics in an attempt to balance their budgets in fiscal year 2003:

* 28 states used across-the-board cuts;

* 22 states drew down their rainy day funds;

* 17 states laid off employees;

* 8 states offered early retirement; and

* 10 states reorganized agencies and programs.

A variety of other measures were used in 29 states, including refinancing state debt, hiring freezes, tobacco settlement securitization, deferred payments, and fund transfers.

"Governors have reigned in spending over the past two fiscal years, with most states reporting growth rates less tan the previous years. The trend will continue next year – a record high 19 states have proposed negative growth budgets," said NGA Executive Director Ray Scheppach.

However, growth in Medicaid continues to put a severe strain on state budgets. The pressure is coming from increased state costs for pharmaceuticals and increased enrollments in Medicaid, according to a recent report from the Kaiser Commission. The Fiscal Survey indicates that while cost containment measures have resulted in a steep reduction in the growth rate of the state share of Medicaid, state Medicaid expenditures have exceeded the amounts originally allocated for the program. Twenty-eight states anticipate Medicaid shortfalls in the current fiscal year.

"The growth rate is down because of cuts that are being made to the Medicaid programs in states throughout the country. The reality is that poor women and children are either experiencing a reduction in benefits or are being removed from the rolls all together. The Medicaid growth rate is not declining because costs are down. It is a simple reality – a governor has to make cuts to the program in order to balance the state’s budget. If enrollment rates go up and drug costs go up, then the only way to afford the program is to cover fewer people," said Scheppach. "For most governors these difficult choices have become a daily reality."

Governors in 29 states have proposed revenue increases by raising taxes and fees, while three states proposed decreases. The revenue increase data for fiscal year 2003 indicate the following:

* 15 states proposed sales tax changes, for a net increase of $6.2 billion-with California accounting for $4.4 billion of the net amount.

* 10 states will modify their personal income taxes, totaling $5 billion.

* 11 states will adjust corporate income taxes, totaling $759 million by closing loopholes and eliminating credits.

* 14 states raised so-called "sin taxes" on cigarettes, tobacco and alcohol.

* Alaska and Michigan will increase motor fuel taxes.

* 17 states chose other methods, such as gaming taxes, nursing home surcharges, and hotel occupancy taxes, while 19 states will increase various fees.

Perhaps the greatest indicator of fiscal pain is the near total decimation of state reserve funds. These funds represent ending balances and "rainy day" funds typically used by governors to respond to unforeseen circumstances. Total balances peaked in fiscal 2000 at $48.8 billion. However, by fiscal 2003 total balances are estimated at only $6.3 billion. Total balances for actual fiscal 2002, estimated fiscal 2003, and recommended fiscal 2004 all fall below levels considered to be an acceptable fiscal cushion.

The Fiscal Survey of States is the most accurate gauge of the health of states’ budgets. It assembles data self-reported by states on their general fund budgets. General fund budgets are the current, operational plans that states use to finance most broad-based state programs and services and thus are the most important element in determining states’ overall fiscal health. General funds are about one-half of state expenditures. States also make expenditures from other dedicated state funds (such as for education or transportation), from bonds, and from federal grants-in-aid. Budgets reflect states’ policies, revenue estimates and planned spending for the coming fiscal year as agreed to by governors and legislatures.

Related Files Fiscal Survey of States – Spring 2003 http://www.nga.org/cda/files/FSS0603.pdf

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