No ‘Conspicuous Improvement’ Expected in State Finances

By Karen Diegmueller — August 05, 1992 3 min read

State governments, which are already struggling to meet growing demands for services, have little to look forward to but strained budgets and political conflict during the fiscal year that just got under way, a preliminary report by the National Conference of State Legislatures suggests.

“State governments’ fiscal outlook is as clouded as that of the national economy,’' says the report, which was released at the N.C.S.L.'s annual meeting here last week.

Moreover, the report notes, “legislative fiscal officers do not expect conspicuous improvement in state finances in the coming year.’'

“We will be facing another year of strife in state legislatures,’' warned President of the Senate Paul (Bud) Burke of Kansas, the president of the N.C.S.L., at a press conference.

Steven D. Gold, the director of the Albany, N.Y.-based Center for the Study of the States, offered a similarly dire assessment. “Fiscal stress is on the agenda for state and local governments,’' he told convention attendees.

The report indicates that state revenues are expected to grow by 7.1 percent in fiscal 1993, up from a 4.2 percent increase in fiscal 1992. The document argues, however, that what appears as modest growth is in fact due almost entirely to tax-law changes and inflation.

The report also points to the continuing rise in unemployment as another factor likely to make additional revenue scarce.

A Worsening Picture

As gloomy as the preliminary report is, its authors indicate the picture could worsen once data are in hand from some of the largest states that “have been experiencing fiscal problems ranging from serious to disastrous.’'

Among the states with severe money woes are Illinois, Massachusetts, Michigan, Pennsylvania, and California, which has been issuing I.O.U.'s to some creditors. (See story, page 1.)

Budget data in the report are based on information provided by 40 states; 46 states and Puerto Rico submitted tax information.

“California will carry an FY 1992 deficit of about $4 billion into FY 1993, an amount that exceeds the total reserves of all the states covered in this report,’' the report says.

On the other hand, the study notes, prospects for states in the Southeast and a few other areas appear brighter because of the enactment of revenue increases.

One of the best indicators of a state’s financial health, according to fiscal experts, is its budget surplus. But in states that previously relied on budget reserves, those “rainy day’’ funds may have all but dried up.

“Most states have seen their reserves vanish in the course of FY 1992, and they expect little recovery in FY 1993,’' the report notes.

The N.C.S.L. suggests that states maintain 5 percent of their general-fund expenditures as a prudent reserve level. Based on data from 40 states, reserve levels had fallen from 2.6 percent at the beginning of fiscal 1991 to 1.4 percent by the end of fiscal 1992.

Caution on Taxes

As the reserves were shrinking, though, states were reluctant to raise taxes to replenish their coffers. Lawmakers raised taxes only one-third as much as they did in fiscal 1991.

Seven states cut taxes, including New Jersey, where the new Republican majority in the legislature was elected last fall on a campaign platform of tax reductions.

Meanwhile, expenditures for such programs as Medicaid and Aid to Families with Dependent Children have grown rapidly as the recession has thrown more people into poverty.

As a result of the recession, Mr. Gold noted, “In many cases, the demand for services is going up faster than the revenues.’'

Spending on precollegiate education grew in fiscal 1992, up 5.9 percent from the previous year, the report says. Legislatures have earmarked a 5.5 percent increase for fiscal 1993.

Five states--Arizona, Connecticut, New York, Vermont, and West Virginia--cut education spending, according to the report, and additional cuts were anticipated when all the data were submitted.

Even though K-12 spending rose, said Gary Olson, the director of the Senate Fiscal Agency in Michigan, the future of education funding is doubtful unless states can bring Medicaid expenses under control.

A version of this article appeared in the August 05, 1992 edition of Education Week as No ‘Conspicuous Improvement’ Expected in State Finances