Education Funding

State Budget Report Finds Improved Revenue Outlook, Growing Costs

April 26, 2005 3 min read

As state lawmakers hammer out their education budgets for fiscal 2006, leaders in many states are seeing promising revenue projections countered by the spiraling costs of Medicaid and other health-care programs.

That’s the word from the National Conference of State Legislatures, which released its twice-a-year survey of state budgets this month. The report by the Denver-based group shows, at best, a lukewarm economic forecast for schools and other state services.

“State Budget Update: April 2005,” is available for purchase from the National Conference of State Legislatures by contacting NCSL’s Publications Department at 303-364-7812.

“States are barely keeping their heads above the rising tide of new costs,” said Maryland Delegate John Hurston, a Democrat and the NCSL’s president. “Medicaid and other health-care expenses, in addition to demands from corrections, state parks, employee health insurance, and K-12 education are making it tough for states to do anything but tread water.”

“It’s a mixed bag,” Corina Eckl, the author of the report and the NCSL’s fiscal-program director, said in an interview last week. According to the report, better-than-projected tax revenues in most states are making things easier for legislators during the 2005 sessions. But trouble may lie ahead.

More states reported midyear budget deficits for the current fiscal year than in fiscal 2004. Thirty-one states reported fiscal 2005 spending overruns, compared with 23 states in November of 2004. Medicaid and other health costs are exceeding expectations in 23 states.

As lawmakers begin passing budgets for fiscal 2006, which begins July 1 for all but four states, 26 states have reported potential budget gaps in the coming year. In 17 states, the shortfalls could be serious, reaching more than 5 percent of general fund spending, the report said. The biggest projected gaps were in Maine (12.4 percent), and California and New York (10 percent).

Fueling the gaps are the unrelenting demands for K-12 education and other key services as health-related costs soar.

“This is a fundamental mismatch between revenue growth and spending growth. So, even when you have revenues performing strongly,” Ms. Eckl said, “if their pace of growth isn’t sufficient to cover the costs of K-12, health care, and Medicaid, you’re going to have this ongoing structural deficit problem.”

Anne W. Miller, the executive director of the Reston, Va.-based Association of School Business Officials International, said most school administrators reported in a recent ASBO survey that their top budget concerns involve health-care costs and fuel prices.

“The manufacturing industry is making headlines on health-care costs, but few people realize that the same issue is having a major impact on education,” she said.

The good news for many states is that tax revenues are running above projections, according to the NCSL report. Sales-tax and user-fee proceeds are at or above predicted levels this fiscal year in 39 states, it says. Corporate-tax collections are above projections in 37 states, and personal-income taxes are meeting projections in a majority of states, the report adds.

Structural Gaps

But the overall tepid forecast for state budgets stems, in part, from structural problems in those budgets. According to the NCSL report, about half the states reported that they face structural deficits, which develop when ongoing revenues are insufficient to cover ongoing expenditures.

Having exhausted one-time revenue sources to make up spending imbalances, several states are taking action to fix the structural problems in their budgets.

Colorado lawmakers may ask voters this year to resolve a conflict between the limits on allowable revenue growth and required levels of K-12 spending. Idaho, Nevada, and Virginia have passed recent tax-code changes aimed at structural gaps, and Iowa is studying the problem.

“There’s no significant effort nationally to try to close these structural gaps, and quite frankly, there’s no reward for doing so,” Ms. Eckl said, however.

Education leaders likely can’t expect lawmakers to raise taxes and fees, even for precollegiate education needs, she said.

“What that means is continued focus on program efficiencies … [and] continuing to do more with less,” Ms. Eckl added.

The NCSL estimates that Congress plans to shift up to $30 billion in spending to the states in the federal government’s 2006 fiscal year, which begins Oct. 1, putting an even greater squeeze on state budgets.

“This is a fragile time for state budgets,” Ms. Eckl added.

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