Flush with Cash, States Spend and Cut

Four short years ago, 37 states were in fiscal crisis, many making several rounds of deep spending cuts to cope with the most dramatic reduction in revenues in 20 years. In all, more than $15 billion were shaved from state budgets. Twenty-one states experienced negative revenue growth in FY 2003, forcing even deeper cuts. The fiscal winter of '02-'03 slowed many states' strategies for supporting growth in their knowledge-based economies.



In contrast, the latest June 2006 Fiscal Survey of the States, prepared by the National Association of State Budget Officers and the National Governors Association, reveals only four states were forced to reduce enacted budgets during FY 2006 because of revenues falling short of projections when budgets were enacted. The four were Indiana, Louisiana (post-Katrina), New Jersey and Rhode Island.



In fact, total state general fund spending was 7.6 percent higher in 2006 compared with 2005 - 18.75 percent higher than the 29-year historical average annual growth rate of 6.4 percent. State contributions to Medicare account for most of the growth, however. Federal contributions for Medicare are not keeping pace with the growth in costs, forcing the states to assume a larger share of the federal program's costs.



With revenues exceeding expectations and enacted budgets, more states are returning money to taxpayers than saving for the next inevitable downturn in revenues. State officials in 20 states are proposing tax cuts. In aggregate, the survey finds state governors proposed a $1.4 billion net cut in personal income taxes in 2006.



At the same time, year-end balances collectively comprised $47.3 billion or 7.9 percent of revenues in FY 2006, down from $48 billion or 8.7 percent of revenues in FY 2005. Storm clouds appear to be brewing based on the survey's findings for FY 2007, during which year-end balances are projected to fall to only $32.5 billion or 5.2 percent of revenues.



The June 2006 Fiscal Survey of the States is available at: http://www.nasbo.org/Publications/PDFs/FiscalSurveyJune06.pdf