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New Report Documents Hard Times for State Budgets

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State governments found themselves sinking deeper into a fiscal quagmire over the past year, according to a report by the National Governors' Association.

For many states, the 1992 legislative session marked the third year in a row of wrestling with declining revenues and increased spending demands. Despite that lengthening experience in coping with the effects of the stagnant national economy, the new report indicates, most states found that their ability to live within scaled-down budgets was getting worse, not better.

Thirty-five states were forced to reduce their fiscal 1992 budgets in midyear, up from 29 the year before, according to the semiannual fiscal survey by the N.G.A. and the National Association of State Budget Officers.

The states' inability to get a handle on their economic troubles illustrates the stubborness of the recession and bodes more difficult days ahead, the report warns.

Reading between the lines of the survey results, the report concludes that economic growth is likely to continue to lag, that state revenues will not keep pace with even a moderate economic upturn, and that demands for state spending will "explode.''

"Until the nation is on a path of sustainable growth, states will continue to struggle,'' noted Raymond C. Scheppach, the executive director of the N.G.A.

Despite the sobering news, the survey found that K-12 education has escaped much of the budget cutting that has hit higher education and other areas of government.

Rather than providing for expanded programs, however, the funding gains for public schools will do well to keep pace with burgeoning enrollments, the groups said. Although the 37 percent funding increase projected for education during the 1990's appears to compare favorably with an expected 12 percent increase in enrollment, analysts pointed to extensive school-construction needs and other rising costs, including energy bills.

General Tax Increases Rare

Attention to education accounted for some of the biggest financial decisions by states during their 1992 legislative sessions, the report notes. Lawmakers shied away from general tax increases to balance budgets, instead raising fees and miscellaneous taxes and focusing on program cuts and the downsizing of state government.

The exceptions were Tennessee, which passed a temporary sales-tax increase to raise school funding, and Kansas, where state taxes were raised in an effort to reduce schools' reliance on local property taxes. In both cases, however, lawmakers were spurred by legal action in school-finance cases.

The report also found state leaders engaged in extensive retrenchment in expectation of a prolonged financial slump. As lawmakers backed away from increases in sales, income, and corporate taxes, they opted for the lowest revenue increases since the recession began.

At the same time, the report notes, states have made only slight progress in shoring up their budget reserves. Balances bottomed out in fiscal 1992 at 0.3 percent of state budgets, rising to an estimated 1.3 percent during the current fiscal year.

Even the higher level, the report points out, is equivalent to a family that spends $50,000 a year having only $700 in its savings account. That is "hardly enough for many emergencies,'' the report suggests.

The survey found that states are continuing to cut personnel, shift benefit costs, change budgeting practices, and implement management changes. In Michigan, local school-aid payments were restructured, while Missouri reorganized its children's-services programs.

"As states increasingly have been forced to make mid-year corrections, many are seeking solutions to permanently reduce state obligations,'' the report explains. "Delays or one-time adjustments do not address the budget imbalance over the long run.''

Creeping Out of Recession

Even as some regions report signs of an economic rebound, the report makes clear that many economic signals point to trouble for states hoping to catch the coattails of a recovery.

Growth in service occupations may elude states that do not tax services, the report notes, and greater international competition is expected to squeeze corporate profits and corporate-income-tax revenues. Moreover, the economy is more likely to creep than to soar out of the current doldrums, the report says.

A regional look at state fiscal circumstances showed that the Rocky Mountain and Plains states were running well ahead of the national economy. Slow growth was reported in the Southwest and tiny gains were found in the Great Lakes states.

The New England and Far West regions, where the recession has taken its greatest toll, continue to struggle with no end in sight.

An uneven recovery was reported in the Southeast, with the poorest states marking the greatest growth and the region's wealthiest states--Florida and Virginia--having the most trouble. Hard-hit Mid-Atlantic states have seen a mixed picture, with growing unemployment but some improvement in construction, manufacturing, and retail sales.

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