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Anticipating Economic Woes Ahead, States Limiting New Outlays

By J. R. Sirkin — March 19, 1986 4 min read


Following a year of healthy spending increases, state governments are again tightening their fiscal belts, fearful of federal budget cuts and uneven economic conditions, according to a survey of state budget officers.

But based on revisions of earlier estimates, the budget officers report that most state’s economic fortunes improved dramatically in fiscal 1985, enabling them to pile up cumulative year-end balances of $8-billion, or about 4.3 percent of that year’s general-fund expenditures.

Those balances, which were significantly higher than state budget officers had predicted six months ago, permitted the states to raise spending in the current fiscal year by an average of 9.7 percent—the largest single-year spending hike since the 1970’s—even though revenues rose by only 4.9 percent.

At the same time, an increasing number of states have been stashing funds in “rainy day” accounts, which are expected to hold a cumulative $3 billion by the end of fiscal 1987.

Wide Regional Variations

The increased fiscal 1986 spending levels and the growth of rainy day funds lend at least some support to Reagan Administration claims that the state; are in strong enough fiscal shape to withstand cuts in federal aid.

But according to the budget officers, the aggregate spending hikes mask wide regional disparities in the fiscal condition of the states. While New England and the mid-Atlantic state. are enjoying relative prosperity, 17 states, primarily in agricultural and energy-producing areas, have taken steps to cut retroactively their fiscal 1986 budgets. (See Education Week, Feb.19, 1985.)

The “most dramatic changes” are occurring in the Western and Southwestern states, which derive much of their revenues from taxes on oil and gas, the survey reports. As the prices of these products have dropped, so too have state revenues.

And with year-end aggregate balances projected to fall to “razor thin” levels of 4.3 billion this year and $3.1 billion next year, 12 states are reporting that they will spend less in fiscal 1987 than in the current fiscal year.

When dollar amounts are adjusted for inflation, 20 states will spend no more in fiscal 1987 than in the current year, the budget officers report.

At the same time, fiscal 1987 revenue growth is projected to outstrip growth in expenditures, 5.8 percent to 4.9 percent, they report.

“Few governors are proposing any major new spending initiatives,” the report states. “Rather, states are maintaining the status quo.”

Surveyed Twice a Year

The fiscal survey, released here last week, is conducted twice a year by the National Association of State Budget Officers and the National Governors’ Association.

Its release last week came as state and local officials were trying to fend off pending cuts in federal aid by claiming that they cannot absorb such cuts.

Under the Gramm-Rudman-Hollings deficit-reduction law, the states face a $6-billion cut in federal outlays in fiscal 1987, while the Reagan Administration’s proposed budget would slash intergovernmental transfers by $9.7 billion.

According to a recently released report by the nonpartisan Congressional Research Service, the states have already seen their federal grants reduced by 23.5 percent since 1980.

In addition, the first round of Gramm-Rudman-Hollings cuts, which went into effect on March 1, reduced federal outlays to states by $880 million, according to state estimates.

In presenting the fiscal survey, Raymond C. Sheppach, the executive director of the N.G.A., said the governors hope that cuts in federal aid can be held to no more than 3 percent in fiscal 1987.

Citing the slim projected year-end balances for fiscal 1986 and 1987, he said that “there’s obviously not a lot of room there to absorb federal budget cuts,” adding that most states are reluctant to raise taxes to compensate for lost federal funds.

Despite this year’s 9.6 percent spending increase, he asserted that the states had not “bounced back” from the 1981 recession, when many of them slashed spending and raised taxes.

Rather, he Bald, the states had benefited from unexpected growth in the national economy in 1984, which bloated state treasuries. He said growth was strongest in the New England states because of the high level of education in that region, along with the expansion of defense-related industries located there.

Education a Top Priority

According to the survey, education remains a top priority in the states, followed closely by economic development. Education was cited as a priority in more states—35—than any other state function.

State governments provide about half of all revenues for public schools. In many states, education is the single largest line item in the budget.

The report attributes “a significant proportion” of the 1986 spending increases to the “renewed commitment of state governments to improve the quality of education.”

It also reports that six of the states that cut their 1986 budgets exempted education.

But the budget officers emphasize that few states are planning spending increases for education in fiscal 1987 over and above the cost of recurring obligations as a result of the reform movement.

A version of this article appeared in the March 19, 1986 edition of Education Week


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