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Published in Print: June 21, 2006, as States Report Fiscal Health Still Strong

States Report Fiscal Health Still Strong

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Most states continue to experience sound fiscal health, and as a result have been able to cover rising K-12 education costs, according to a report on state budgets released last week.

Prepared by the National Governors Association and the National Association of State Budget Officers—both with headquarters in Washington—the report shows that revenue growth continues to exceed projections, but it also sounds a cautious note.

“While this is positive, states realize that meeting increasing expenditure expectations with limited revenues will likely be problematic,” the report says.

Spending on elementary and secondary education continues to take up a significant portion of states’ total budgets—21.4 percent. But Medicaid’s share is more than 22 percent, and rising costs for Medicaid and other health-care purposes continue to strain state budgets, according to the report.

In fiscal 2005, Medicaid expenditures exceeded the amount budgeted in 18 states, while 15 states expect that to be the case for the current fiscal year.

“States are still trying to protect elementary and secondary education,” Raymond C. Scheppach, the executive director of the NGA, said last week during a telephone press conference.

He added, however, that because of health-care responsibilities, it’s unlikely that states will be able to maintain that same commitment to higher education.

‘Cuts Are Rare’

For fiscal 2006, state general-fund spending increased 7.6 percent over the previous year. But in fiscal 2007, which begins July 1 for most states, spending growth is expected to increase by a more modest 5.7 percent.

Revenues are also up this fiscal year, exceeding original budget projections in 37 states by an average of 3.4 percent. Corporate income taxes, for example, were 12.6 percent higher than expected, and personal income taxes were 3.5 percent higher.

“Budget cuts are rare right now,” Scott D. Pattison, the executive director of NASBO, said during the June 11 press conference at which the report was released.

State Fiscal Trends

Annual percentage increases in state budgets.

*Click image to see the full chart.

Click to enlarge: State Fiscal Trends

Not all states are sharing in the wave of economic recovery.

Four states—Indiana, Louisiana, New Jersey, and Rhode Island—were forced to reduce their enacted budgets by a total of more than $688 million in fiscal 2006.

Louisiana, where the current budget was cut by more than $431 million out of a budget of $18.7 billion, faced significant challenges because of Hurricane Katrina, which ravaged the Gulf Coast last August. The state laid off employees, offered early-retirement packages, and made across-the-board spending reductions to address a budget shortfall.

The other states with shortfalls froze hiring, restructured debt, and closed tax loopholes, among other tactics, to trim spending.

The survey of states, conducted from January to June of this year, noted that year-end balances for fiscal 2005 were more than $48 billion, and were expected to be just over $47 billion in fiscal 2006.

“This is another indicator that states have been very responsible, given the upward trend in revenues,” Mr. Pattison said.

Vol. 25, Issue 41, Page 26

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