Economic Shifts, Federal Aid Cuts Could Imperil States, Study Finds

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Washington--State governments are holding the line financially, but sudden shifts in the economy or reductions in federal spending could place many in a precarious position, a new study concludes.

The report, released here this month by the National Governors' Association and the National Association of State Budget Officers, projects that at the end of the current fiscal year, states' general-fund ending balances will average just 1.1 percent of total expenditures, the lowest proportion in the 12 years that the groups have collected such data.

In addition, the study notes that in fiscal 1989 state revenues are expected to grow by 5.4 percent, while expenditures are expected to jump by 6.8 percent.

"It is obvious that if [this trend] continues for an extended period of time, the inevitable reconciliation between the need for additional revenues or constrained state spending will have to be addressed," the report states.

The report found that states in the Northeast and Far West regions of the country "continue to enjoy solid growth."

"But other regions of the country that were hurt by poor farm economies or the downturn in energy prices, with a few exceptions, are making significant progress toward improving their economic and budget positions," it added.

New England was found to have the lowest unemployment rate and the highest rate of personal-income growth. Mideastern states, it added, are "nearly as prosperous" as their northern neighbors, "with unemployment rates lower than the national average and an increase in personal income 1 percent higher than the national average."

The Great Lakes states, meanwhile, "still face an unemployment rate that is higher than the national average," the report says, although their increase in personal income4matched the national average. The unemployment rate in Plains states, it notes, "dropped dramatically" in the past year, but so did the rate of increase in personal income.

The Southwest reported both the lowest personal-income increase and the highest unemployment rate, the study found.

The Southeast "enjoyed a drop in the unemployment rate [and] an increase in personal income," it found. In Rocky Mountain states, the report says, "personal income is the lowest in the nation, while the unemployment rate is slightly above the national average."

The study, "Fiscal Survey of the States"--produced twice annually by the nga and nasbo--also includes the following findings:

In real terms, the rate of growth in state spending in the last three fiscal years is the lowest it has been since the recession of 1982 and 1983, when state spending declined.

Eighteen states reduced expenditures or took other steps to address budget or cash-flow shortfalls in fiscal 1988. Budget cuts, which totaled $903 million, ranged from a high of 5.9 percent in Kentucky to a low of 0.2 percent in Arizona.

In addition, the study notes that "the effects of the drought, particularly on the midwestern states, remains to be seen and will begin to show during fiscal 1989."

In all, 27 states approved new taxes for fiscal 1989 that are expected to raise revenues by slightly under $800 million. That figure "pales in comparison to the $6 billion that was raised in fiscal 1988," the report notes.

Copies of the study can be obtained for $20 each by writing nga Publications, 444 North Capitol St., N.W., Suite 250, Washington, D.C. 20001-1572.--tm

Vol. 08, Issue 07

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