Published Online: August 9, 2007

States Face Bumpy Budget Forecast as Revenues Seen to Peak

Although state fiscal conditions are solid, budget and tax data from across the country suggest that states’ revenues already have peaked for this decade and that officials are destined for some financial belt-tightening, according to the latest survey by the Denver-based National Conference of State Legislatures.

The report, released here today at the group’s annual meeting, raises red flags that could spell trouble for future K-12 spending, since public school aid makes up about 50 percent of states’ budgets.

“Evidence indicates that [fiscal] 2006 was the peak for state fiscal health this decade,” according to the report, written by Corina Eckl and Ron Snell of the NCSL Fiscal Affairs Program. The annual report covers fiscal 2007, which ended on June 30 in most states, and the 2008 budget year. “The trend is downward,” it says.

The survey includes budget data from 45 states; California, Illinois, Michigan, North Carolina, and Wisconsin had not completed their budgets in time for the report. Since those states are mostly large, with big budgets, and three are in the struggling Great Lakes region, NCSL fiscal experts expect the national outlook to grow a bit dimmer when the rest of the states are included.

States’ year-end balances—or how much financial cushion they’re carrying forward to the next budget year—are dropping. Aggregate year-end balances fell 7 percent from fiscal 2006 to the end of fiscal 2007. Those balances are expected to fall by 24.3 percent from fiscal 2007 to fiscal 2008.

The reason for the fall, according to the report, is that states are enacting tax cuts and seeing weaker revenue projections while their spending is growing.

Education has been one of the beneficiaries, meanwhile, of spending growth. Total state spending on K-12 education is expected to grow nearly 10 percent this fiscal year—compared with the 8.1 percent in growth budgeted for state spending on Medicaid, the fast-growing health-care program for the elderly, the poor, and people with disabilities.

But much of the growth in education spending, especially among states that saw significant jumps in K-12 aid, is due to changes in how schools are funded, and not necessarily a result of new programs or reform measures. Texas, for example, increased school spending by 32 percent, in part to further decrease school district property-tax rates, according to the report. Connecticut boosted spending by nearly 15 percent to help offset the K-12 spending burden shouldered by towns. Alaska’s nearly 26 percent increase is largely attributed to rising public employee retirement costs, including those of teachers.

David Wyss, the chief economist for the New York City-based Standard & Poor’s, who addressed legislators in an NCSL session on Tuesday, predicts that the decisions on education will only get tougher. States will face increasing financial pressures as the housing market continues its slump, energy prices stay high, and baby boomers retire and start collecting on promised state-funded pensions and health-care benefits, he said.

“I can see this clash between education funding and health-care funding,” Mr. Wyss said, adding, “I would rather invest in the future”—meaning in education.

Maryland already is facing tough choices. The state will have a $1.4 billion budget deficit by fiscal 2009, Delegate Sheila E. Hixson, the Democratic chairwoman of the Maryland House ways and means committee, told fellow legislators. And that’s just the amount needed to maintain stable funding for services, without giving increases to important state priorities such as education.

Maryland’s K-12 budget for fiscal 2008 is $6 billion, and that amount is up by $1.5 billion since fiscal 2002—the biggest driver of increased spending in Maryland, Ms. Hixson said. Now, legislators will have to find additional money to sustain the higher K-12 funding—by raising taxes, creating new sources of revenue (such as gambling), cutting other programs, or some combination of those strategies.

“There’s no question… [increasing school aid] will greatly benefit schools,” Ms. Hixson said. “We still have a big obstacle to overcome: We have to find a way to pay for it.”

Vol. 26

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