State Budgets Better Off Than a Year Ago

States are finding it easier to balance their budgets in fiscal 2004 than they did in fiscal 2003, but for a number of states, the outlook isn’t too good for the coming fiscal year, according to a new report by the National Conference of State Legislatures.

The current overall gap in the general funds of states is $2.5 billion, or just one-tenth of the $25.7 billion gap that existed around this time a year ago.

That figure from a year ago may sound like a lot, but when states started fiscal 2004, which for most states was last summer, they faced a cumulative budget gap of some $78.4 billion.

States received a welcome infusion from the federal government of $20 billion, though that was a one-time allocation for the current fiscal year, explained Arturo Pérez, a fiscal analyst for the Denver-based NCSL. “The [federal aid] was a huge shot in the arm, there’s no doubt about it,” he said. Mr. Pérez explained that $10 billion of the federal emergency funds was unrestricted and the other $10 billion was earmarked to pay for Medicaid costs alone.

While state budgets are better off in fiscal 2004 than the previous year, the economy has not improved to the extent that states are actually better off than they were before they received the extra federal funds, Mr. Pérez added.

And because K-12 education spending makes up about one-third of all state funding, continued pressure on state budgets will likely result in continued pressure on education aid, he said.

Looking ahead, the report, issued Feb. 19, calls the outlook for state budgets in fiscal 2005 “worrisome.”

As legislatures discuss budgets for the new fiscal year, which begins July 1 for most states, the projected total gap for all states is $35.6 billion. Twenty-eight states are projecting budget gaps.

Real Cuts

In total dollars, the state that is forecasting the largest budget gap for fiscal 2005 is California. The Golden State’s projected gap of $15 billion accounts for 42 percent of the overall gap for all states.

But two other states, Alabama and Alaska, predict gaps that make up larger proportions of their general funds than does the gap for California. Both Alabama and Alaska have gaps amounting to more than a quarter of their general-fund budgets, while the budget gap for California amounts to 19.2 percent of its general-fund budget.

The impact of California’s budget problems is likely to be greater on schools in fiscal 2005 than it was during the previous two years, warned Gerry Shelton, the director of fiscal and administrative services for the California Department of Education.

That’s mainly because the budget proposed by Gov. Arnold Schwarzenegger, a Republican who took office in November, includes a $2 billion reduction in what the school funding level should be for 2005.

The governor is proposing that the legislature temporarily suspend a state law—a ballot initiative implemented in 1988 called Proposition 98—that guarantees funding will not drop below that of the previous year and will also include adjustments for enrollment growth and inflation.

If the legislature agrees to the plan, said Mr. Shelton, “it’s not like this is just a paper cut.”

“This will be a real cut for districts,” he said.

California voters will go to the polls March 2 for the state’s primary elections and will also decide whether to approve a $15 billion bond that would patch up the state’s budget deficit this year. The measure, proposed by Gov. Schwarzenegger, would in essence mortgage the remainder of the state’s budget deficit for 15 years, a move some say is dangerous because the state’s bond rating has fallen to just above junk-bond status during the fiscal crisis. Gov. Schwarzenegger has vowed, though, that the state will function within its means in coming years and not allow budget deficits to occur.

Continuing Deficits

All states but Vermont are required by law to balance their budgets at the end of each year. For several years, some states have been constantly playing catch-up in covering expenses, or carrying a structural budget deficit, though it won’t show up on the books at the close of each fiscal year.

Indiana, for instance, has had a structural budget deficit of $800 million since fiscal 2002. The state has balanced its books in part by making cuts in education and delaying payments to schools. For fiscal 2005, Indiana’s budget deficit is projected at $900 million, or 8.1 percent of its budget.

“At some point, we need to spend down and pay off the units of government the money that is owed to them,” said Terry Spradlin, the legislative liaison for the Indiana Department of Education.

Because Indiana enacts a new budget every two years, no budget sessions are scheduled for 2004.

“We were hoping that the 2005 [legislative] session would be a session in which we could talk about the investment of new dollars into needed programs, but it’s going to be another discussion about holding on to what we have,” Mr. Spradlin said.

New Jersey likewise has struggled with a structural budget deficit. For fiscal 2005, the state has projected a gap of $4 billion, or 16.6 percent of its general-fund budget.

Funding for most New Jersey schools was frozen in fiscal 2003 and increased slightly in fiscal 2004. But Gov. James E. McGreevey, a Democrat, has proposed that in fiscal 2005, school districts will get at least a 3 percent increase in their budgets, said Ronald C. Rice, a public information officer for the New Jersey Department of Education.

The legislature has yet to approve that spending hike, however.