Fiscal conditions for states darken slightly

States continued to experience robust revenue generation along with rising expenditures in the most recent fiscal year, but their expectations for next year are less rosy, according to a report issued Wednesday.

The annual “Fiscal Survey of States” shows that state budgets remain in substantially better condition than during the early years of the decade, but the groups project declining revenues and rising spending next year. The National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) issued the survey.

“NGA and NASBO found that while most states experienced healthy revenue growth during fiscal 2007, some states already have seen significant deterioration of their fiscal conditions and expect revenue and expenditure growth to slow significantly in fiscal 2008,” the groups said in a joint statement.

Although the picture is not nearly as dire as during the last recession in the early 2000s when states experienced their worst budgetary crisis since World War II, the potential for future budget  problems  could increase pressure on federal policymakers to provide aide.

Because nearly all states are constitutionally required to balance their budgets each year, governors routinely turn to Congress for help when spending on priorities such at education, healthcare and highways threaten to put the squeeze on them and their legislatures. With the federal budget in poor condition and Congress and the administration in a standoff on spending, states might not find as receptive an audience in the future as they have in the past.

NGA Executive Director Ray Scheppach commented, “Steadily rising healthcare costs, softening in the housing sector and the need to address looming issues such as aging populations are putting mounting spending pressure on states at the same time as federal funding for critical programs is leveling. Governors realize that meeting these increasing expenditure expectations with limited revenues will be problematic in the future.”

Escalating costs for Medicaid, state retiree pensions and infrastructure maintenance and repair will be the chief sources of future pressure on state budgets, according to the report.

Medicaid, the health insurance program for the poor, is a particularly heavy burden for states, which share the costs roughly 50-50 with the federal government. Healthcare expenditures constitute about one-third of states’ spending every year, with Medicaid alone making up 22 percent of state budgets.

The report makes only a passing reference to the State Children’s Health Insurance Program, but congressional inaction on reauthorizing and expanding the program this year would create an additional burden on states, 21 of which are projected to run out of federal money next year absent new federal legislation, the Congressional Research Service has determined.

The housing crisis threatens to worsen the program, the NGA and the NASBO said, “both directly from lower sales tax revenues and indirectly as local governments struggle with declining property values and decreasing property tax revenues.”

State spending in fiscal 2007 rose 9.3 percent, which is substantially higher than the 30-year average rate of 6.4 percent. Next year, states are projected to increase spending by a much smaller 4.7 percent, based on the budgets passed by legislatures. Fiscal 2007 ended on June 30 in 46 states.

“The high rate of growth [in 2007] is the result of states using surpluses realized in recent years to provide tax cuts and bolster spending on programs that experienced significant budget cuts in the last fiscal downturn,” the report states.

The total combined balance among the 50 states in fiscal 2007 was $69 billion, which is 11.5 percent of total expenditures. This represents an increase in total balances from the $63 billion reported for fiscal 2006 but also a larger share of total expenditures than the prior year, in which it was 9.6 percent. The budgets enacted for fiscal 2008 would create a $46 billion balance and an even lower share of expenditures, 6.7 percent.

On the revenue side, states on the whole were less likely to lower taxes for fiscal 2008. Net reduction in taxes and fees were $115.5 million, reflecting the enactment of cuts in 24 states, compared to $2.1 billion for fiscal 2007. States cut $1 billion in personal income taxes, which was largely offset by $761.8 million in new tobacco taxes. Eighteen states enacted some form of tax increase.

“The report shows that most states are moving from peak fiscal conditions to a period of much slower spending and revenue growth,” NASBO Executive Director Scott Pattison said. “State spending growth is expected to slow in fiscal 2008, and long-term spending pressures suggest some states will face very tight budgets in the next few years,” he said.