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Report Documents New Round of State Fiscal Lows

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The health of state budgets continued to decline for the third straight year and year-end balances are expected to near rock bottom, according to a report issued last week by the National Governors' Association and the National Association of State Budget Officers.

Policymakers must begin to confront the possibility that the sluggish economic climate--and tight fiscal situation--may continue throughout most of the decade, the report warns.

The groups' semiannual survey found that this year produced a new round of financial lows for the states.

"Even after the massive budget cuts and tax increases of fiscal 1991 and 1992, states have yet to witness the normal signs of a recovery,'' the report points out.

Strategies originally thought of as one-time fixes to temporary budget shortfalls have become institutionalized, the report suggests, as states continue to find themselves strapped for cash despite savings measures ranging from program cuts to travel and hiring freezes.

"The states now realize they are not just dealing with short-term cyclical budget problems,'' said Raymond C. Scheppach, the executive director of the N.G.A. "They recognize that revenue growth in the 1990's will be moderately if not significantly lower than in the 1980's.''

Focus on Streamlining

Permanent streamlining and efficiency efforts "are becoming top priorities,'' Mr. Scheppach said, noting that 36 states are conducting reviews to identify duplication, waste, and targets for reform.

"States are focusing on program efficiency, privatization, performance measures, information systems, staffing, and personnel systems,'' said Brian Roherty, the executive director of NASBO.

States are particularly eager to locate savings in big-ticket programs such as education and Medicaid, Mr. Roherty noted.

Officials said a quick look at states' fiscal plight explains the preoccupation with economizing.

Among the report's findings:
State balances are expected to drop to 0.8 percent of total expenditures in fiscal 1992 and rebound only to 1 percent for 1993. Fiscal experts generally recommend that states maintain "rainy day'' reserves of at least 5 percent of spending.

  • Thirty-five states have been forced to make $5.7 billion in mid-year cuts in their 1992 budgets.
  • State spending is expected to increase by 5 percent during fiscal 1992 and, based on governors' budget requests, rise by about 3.6 percent in fiscal 1993. Over the past 15 years, by contrast, annual spending growth has averaged 7.4 percent.
  • Only 11 states are proposing a cost-of-living increase in welfare benefits, while 5 states are moving to reduce benefits. In addition, 15 states are recommending reductions in Medicaid funding, 11 states are expected to reduce aid to local governments, and 23 states are revising employee-benefit programs.

Education Outlook Brighter

Despite the growing budget pressures, however, the report indicates that the outlook for education funding looks relatively bright for the remainder of the decade.

Expenditures over the next 10 years are expected to grow by 37 percent, according to the report.

The funding increases, however, will be due in large part to growing enrollments. Officials anticipate that the number of public-school students will climb by 12.5 percent during the decade, to a total of 46.8 million.

Still, the survey found that education will be competing with other state programs for modest amounts of new state resources.

State officials expect revenues to rise by just 5.9 percent in fiscal 1992, even with a total of $15 billion in new taxes. Similarly, officials are projecting next year's revenue to rise by 5.1 percent, supported in large part by $5 billion in tax hikes.

In tapping new funding sources, the report explains, states have begun to focus on new health-care-provider and environmental fees, as well as expansions of the sales-tax base.

Along with the tax hikes, states also will be dependent on economic growth. Relying on growth has been a disappointing strategy in recent years, but this year's state targets may be closer to the mark given officials' lowered expectations and the apparent beginning of a recovery.

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