States' 1994 Financial Picture Brightened, N.C.S.L. Study Notes

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New Orleans

The relaxed look on lawmakers' faces as they strolled from meeting to meeting here last week was due to more than just this city's fabled hospitality. From across the country, state legislators arrived on the heels of a remarkable event: a stable budget year.

After spending much of the early 1990's slashing programs, firing employees, and raising taxes in response to a weak economy, lawmakers attending the annual meeting of the National Conference of State Legislatures found cause for a collective sigh of relief.

A new survey released by the N.C.S.L. found that over the past year, budgets have been on target, nearly every state finished the latest fiscal year in the black, and many states were able to begin rebuilding the reserve accounts they had repeatedly raided.

"This contrasts to what we have been seeing, where states tried to keep their expenditures in line with revenue growth but spending kept getting out of whack,'' explained Ronald Snell, the group's fiscal-program director.

The analysis of fiscal 1994, which for most states ended this summer, found few unexpected developments. As the new fiscal year begins, the projection is for modest growth in tax collections and spending.

Mr. Snell said the mood at the meeting here suggests that lawmakers are not about to tinker with their newfound peace of mind.

"Veteran legislators have had to face enough tax issues and debates about spending over the last few years,'' he said. "They are not going to bite off a round of new programs while things are just starting to go smoothly.''

Michigan Approach Studied

The N.C.S.L. survey found that K-12 spending is maintaining its share as the largest item in state general-fund budgets. For the second year, the survey found, state Medicaid funding surpassed spending on higher education--a trend that fiscal analysts say is likely to continue as health-care costs rise.

For the first time in four years, however, states spent more on colleges and universities than they did on prisons.

The only state that separated itself from the pack was Michigan, where lawmakers late last year passed a law that drastically changed school funding. Voters this spring approved a plan that increased the state's share of funding for schools, with $3 billion in new state taxes replacing an equal amount previously raised through local property taxes.

The survey found interest in the Michigan approach, as more states consider taxes specifically designated for schools.

In addition to Michigan, which is expected to increase state spending on elementary and secondary schools by 72 percent, the survey found six other states that plan to raise education spending by 10 percent or more in fiscal 1995.

Replacing local school funding cut by a statewide property-tax initiative, Oregon lawmakers approved a 25 percent increase in state spending on education. Spending will increase by 16 percent in Alabama, Idaho, and Missouri; by 12 percent in Wisconsin; and by 10 percent in Mississippi.

States with significant school-spending cutbacks are Wyoming and New Jersey, where funding next year will drop by 12 percent, and New Hampshire, where state school funding will decline by about 10 percent.

Nervous Eye on Congress

Two states finished fiscal 1994 with a deficit. Texas officials say the state will be out of the red by the time the current biennium ends next year. But California lawmakers continue to contend with endemic budget problems.

Among some of the survey's other findings:

  • Tax revenues in fiscal 1995 are expected to grow by an average of 4.2 percent, while inflation is expected to be 3 percent.
  • Year-end balances are at 2.7 percent, up from 2.3 percent a year ago, and are more evenly distributed across the country.
  • Personal-income taxes and business taxes were lowered in fiscal 1994. Sales taxes grew.

State legislators said that while the financial news is clearly good, they will keep a close eye on Congress. Lawmakers in Washington may pass crime, welfare-reform, and health-care bills that shift costs to the states, officials warned.

"State fiscal conditions could change dramatically when final decisions are made in Washington,'' said Rep. Karen McCarthy of Missouri, the chairwoman of that state's tax committee and the president-elect of the N.C.S.L.

Copies of "State Budget and Tax Actions 1994'' are available for $15 each, plus $3 shipping, from the N.C.S.L. Marketing Department, 1560 Broadway, Suite 700, Denver, Colo. 80202; (303) 830-2200.

Vol. 13, Issue 40

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