States

States Warned of Slowdowns in Revenues, Spending

By Mary Ann Zehr — December 11, 2007 5 min read
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State officials should expect a continued slowdown in the growth of revenue collections and spending for fiscal 2008, according to a report released last week by the National Governors Association and the National Association of State Budget Officers. The groups said the recent growth of state revenues peaked in the 2006 and 2007 fiscal years.

Fifteen states have reported deficits or projected lower-than-expected revenues for the current budget year, fiscal 2008, largely because of the nationwide slowdown in the housing market. But elementary and secondary school budgets will likely be spared from harm unless economic conditions worsen considerably, leaders of the NGA and NASBO said at a Dec. 5 press conference here.

“The picture is more mixed than it has been in the last eight or 10 years,” said Scott D. Pattison, the executive director of NASBO. “You have some states doing well and others reporting shortfalls.”

He said state spending for fiscal 2008 is growing, on average, at a rate of 4.7 percent—which he views as a healthy rate—but in fiscal 2007, the growth of spending was 9.3 percent. The 30-year average for annual growth in state spending is 6.4 percent, he noted.

“The trends are such that I would be approaching development of state budgets over the next two to three years very cautiously, and expect that any major increase in any area of spending, as well as any major new program, may not have a revenue increase to cover it,” Mr. Pattison said in a follow-up phone interview.

The report says collections of state sales, personal-income, and corporate-income taxes in fiscal 2007 were 5.6 percent higher on average than in fiscal 2006.

Midyear Corrections

But states have planned for more modest growth in tax collection in fiscal 2008—a 2.9 percent average overall increase over 2007. In fiscal 2007, the growth in the collection of sales-tax revenue slowed more than collection of other kinds of taxes. Budget projections for fiscal 2008 reflect 3.4 percent more in sales-tax revenue over 2007, 3.4 percent more in personal- income-tax revenue, and 1.4 percent less revenue from corporate taxes.

In response to budget pressures, some states already are trimming K-12 education funding midway through fiscal 2008, or are making plans to do so in 2009.

In cuts approved as part of a budget-reconciliation bill for fiscal 2008, for example, Maryland legislators agreed in a special session that ended last month to cut $145 million from the fiscal 2009 budget that would have helped schools combat inflationary cost increases. Maryland’s K-12 education budget makes up $5.3 billion, or 37 percent, of the state’s $14.3 billion budget for 2008.

In Nevada, legislators have promised not to dip into support for K-12 operations to address a projected $285 million shortfall in the fiscal 2008 portion of the state’s $6.7 billion biennial budget. But the Nevada Department of Education has been asked to trim its $22.5 million biennial operating budget by $1.7 million.

At the same time, Virginia will not touch any K-12 funds to take care of its $641 million budget shortfall for 2008. About $234 million of Virginia’s shortfall in its $17.3 billion general-fund budget for 2008 is a deficit rolled over to this budget year from fiscal 2007, according to Gordon Hickey, the press secretary for Gov. Timothy M. Kaine, a Democrat. The K-12 education portion of the state’s general- fund budget is $6.1 billion, or 35 percent.

Mr. Hickey said that the state is addressing the budget deficit with cuts as well as using savings from various state agencies and taking money out of a reserve fund.

Property-Tax Impact

The clouds on the states’ fiscal horizon are due, in large part, to the slowdown in the housing market, analysts say, reversing the climate states had enjoyed in recent years.

Arizona, California, Florida, and Nevada had been especially able to take advantage of the growth in the appreciation of housing, said Ray C. Scheppach, the executive director of the NGA, but with the housing market now sluggish, they’ve seen a reduction in revenues. Mr. Scheppach said a projected continued drop in the value of housing could affect local school funding in those states and many others with a slowing housing market. Local property taxes typically are the primary source of money for school budgets.

Mr. Scheppach said a decrease in local property-tax revenue generally lags behind a drop in state sales-tax revenue. And a slow housing market leads to less money in sales taxes, he said, because if fewer people are buying and selling houses, fewer are also buying new home furnishings.

If the economy worsens, Mr. Scheppach said, “we’re going to have states running into some problems, local governments running into more problems, and the federal government not being able to bail them out.”

Mr. Scheppach said higher education budgets likely would be cut before K-12 budgets: “My sense is [states] will operate as they did in the past. They will try to protect elementary and secondary education.”

He added that states have responded to the increasing costs of Medicaid by cutting budgets in practically every area of state services except K-12 education.

Most announcements by state governments of budget shortfalls so far, said Mr. Scheppach, contain the message that “we think we can manage this with targeted cuts.”

James R. Wells, the deputy superintendent for administrative and fiscal services for the Nevada education department, said that in working to address the state’s current budget deficit, legislators told the department to cut its biennial operating budget by 5 percent, or $1.2 million. But later, it was told to cut 8 percent, or $1.7 million.

Mr. Wells said that Nevada’s lower-than-expected state revenue stems from a slowdown in home-building. “The building supplies and materials they can collect sales taxes on are down,” he said, adding that purchases of appliances and home furnishings have also slowed.

While schools’ operating budgets are being spared right now, Mr. Wells added, they could run into financial problems if people in Nevada default on property loans. He noted that the state guarantees to districts one-third of the money they expect to get from property taxes.

“The other two-thirds is the school district’s problem,” he said. “When [property-tax collection] is more than anticipated, they get a windfall. When it’s less, there’s no one to make it up.”

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