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Analysts See Continued State Fiscal Slowdown

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State officials should expect a continued slowdown in the growth of revenue collections and spending in fiscal 2008, according to a report released today by the National Governors AssociationRequires Adobe Acrobat Reader and the National Association of State Budget Officers, which said the growth of state revenues peaked in the 2006 and 2007 fiscal years.

Fifteen states have reported deficits or projected lower-than-expected revenues for fiscal 2008, largely because of the nationwide slowdown in the housing market. But elementary and secondary school budgets will likely be spared from harm unless economic conditions worsen considerably, leaders of NGA and NASBO said at a press conference here today.

“The picture is more mixed than it has been in the last eight or 10 years,” said Scott D. Pattison, the executive director of the National Association of State Budget Officers. “You have some states doing well and others reporting shortfalls.”

He said state spending for fiscal 2008 is growing at a rate of 4.7 percent—which he views as a healthy rate—but in fiscal 2007, the growth of spending was 9.3 percent. The 30-year average for annual growth in state spending is 6.4 percent, he noted.

“The trends are such that I would be approaching development of state budgets over the next two to three years very cautiously, and expect that any major increase in any area of spending, as well as any major new program, may not have a revenue increase to cover it,” said Mr. Pattison in a followup phone interview.

The report says collections of state sales, personal-income, and corporate-income taxes in fiscal 2007 were 5.6 percent higher on average than in fiscal 2006. But states have planned for more modest growth in tax collection in fiscal 2008—a 2.9 percent average overall increase over fiscal 2007. In fiscal 2007, the growth in the collection of sales-tax revenue slowed more than collection of other kinds of taxes. Budget projects for fiscal 2008 reflect 3.4 percent more in sales tax revenue over fiscal 2007, 3.4 percent more in personal income tax revenue, and 1.4 percent less revenue from corporate taxes.

School Funding

The clouds on the states’ fiscal horizon are due, in large part, to the nationwide slowdown in the housing market, analysts said, reversing the climate states had faced in recent years.

Arizona, California, Florida, and Nevada had been especially able to take advantage of the growth in the appreciation of housing, said Ray Scheppach, the executive director of National Governors Association, but with the housing market now sluggish, they’ve seen a reduction in revenues.

Mr. Scheppach said a projected continued drop in the value of housing could affect local school funding in those states and many others with a slowing housing market. School budgets are paid for largely with local property taxes.

But Mr. Scheppach said a decrease in local property-tax revenue lags behind that of a drop in state sales-tax revenue. And a slow housing market leads to less money in sales taxes, Mr. Scheppach said, because if fewer people are buying and selling houses, fewer are also buying new home furnishings.

If the economy worsens, Mr. Scheppach said, “We’re going to have states running into some problems, local governments running into more problems, and the federal government not being able to bail them out.”

Mr. Scheppach said higher education budgets would likely be cut before K-12 budgets: “My sense is [states] will operate as they did in the past. They will try to protect elementary and secondary education.”

He added that states have responded to the increasing costs of Medicaid by cutting budgets in practically every area of state services except K-12 education.

Most announcements by state governments of budget shortfalls so far, said Mr. Scheppach, contain the message that “we think we can manage this with targeted cuts.”

Vol. 27

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Correction: 
An earlier version of this story incorrectly identified Scott D. Pattison and Ray Scheppach.

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