NCSL: States Optimistic Worst of Budget Woes Now Behind Them

The backdrop for this year's annual meeting of the National Conference of State Legislatures (NCSL) was painted in budget cuts, tax increases and nearly three years of gloomy economic news. Only adding salt to the wounds, the meeting was held in California, a state whose FY 2003 deficit – now carried over into FY 2004 because of partisan squabbling – could swallow the entire budget approved in more than half of the states in attendance.

Nevertheless, the states' elected representatives believe FY 2004 will be better and revenues will rebound, according to the latest NCSL fiscal report, State Budget and Tax Actions 2003. Of the 49 states required to balance their budgets, 43 have done so for FY 2003 by turning first to their reserves, specific fee increases and cost cutting measures, the report observes.

The 2003 net increase in taxes at this point, with 42 states reporting, is 1.3 percent of 2002 tax collections. That number may change as more states balance their budgets, but this is only the second time in nine years states have had to bump up taxes. From 1995 to 2001, states lowered taxes every year, as much as 2 percent.

As states tapped reserves to help balance budgets, aggregate budget reserves have fallen. They dropped 48 percent over the past fiscal year, from $22.4 billion at the end of FY02 to $11.6 billion at the end of FY03. The aggregate balance combines states' general fund ending balance with their rainy-day funds.

The states may finally be turning the corner, though, after quarter upon quarter of impending gloom, NCSL reports. State fiscal officers are predicting revenues to rebound in FY04. In 2004, general fund ending balances are expected to rise slightly from FY03 levels. No state participating in the study is predicting a deficit at the end of this fiscal year.

During the past three years, states have had to close a cumulative $200 billion budget gap. In addition to fee and tax increases, to balance FY04 budgets:

• 31 states cut spending. Fourteen of these imposed across-the-board cuts ranging from 1.5 percent to 15 percent. In addition to broad cuts, many also imposed target cuts to programs including corrections, Medicaid and higher education.
• 29 states tapped a variety of state funds.
• 23 states reduced their state workforces or took other actions affecting state employees.
• 13 states tapped rainy-day funds. Because some states are trying to maintain their funds at some minimum level, they were reluctant to draw from funds they had already reduced in previous years.
• 11 states delayed capital projects or shifted them from pay-as-you-go projects to debt. And,
• 6 states expanded gaming.

State Budget and Tax Actions 2003 is available at: http://www.ncsl.org/programs/fiscal/presbta03.htm