Outlook for States' FY 02 Revenues Worsening

The general fiscal condition of state budgets is growing weaker, indicates a preliminary report released August 1 by the National Conference of State Legislatures (NCSL). State Budget & Tax Actions 2001 provides information on 46 states included in NCSL's annual survey. The remaining states – Massachusetts, New York, North Carolina, and Wisconsin – had budgets that were either not passed or awaiting the governor's approval. 



While the fiscal conditions of states were strong a year ago, they have since been replaced by anemic revenue growth and expanding budget gaps, NCSL reports. As many as 17 states had budget shortfalls during fiscal year (FY) 2001. Another 20 states took measures to reach balanced budgets for FY 2002 due to the slowing economy. States with budget surpluses, 22 in all, were able to make deposits to the rainy day fund or other reserves (12 states), offer greater funding for capital projects (eight states), reduce taxes (six states), and target funding for specific programs (six states). 



To eliminate budget shortfalls or enact balanced budgets, 37 states took such actions as: 

• canceling or delaying capital projects; 
• cutting spending; 
• delaying expenditures; 
• implementing targeted or across-the-board budget cuts; 
• increasing state debt obligations; 
• tapping rainy day funds or other reserve funds; and 
• tapping tobacco settlement funds. 

End-of-the-year balances, as a percent of spending, showed decline among the 46 reporting states. According to the NCSL report, 33 states experienced decline between FY 2000 and FY 2001, and aggregate state balances decreased 22 percent, moving from $43.7 billion to $34.1 billion. The latter figure, at 8.2 percent of FY 2001 general fund spending, is 3.3 percentage points lower than the FY 2000 balance of 11.5 percent. This decline, notes the report, marks the first time since FY 1992 that the ending balance failed to meet or exceed the previous year's balance and signifies the largest percentage drop since FY 1980. 



Other highlights of the NCSL report include: 

• Revenues for the 46 states grew 4.5 percent between FY 2001 and FY 2000; spending grew 9.1 percent during the same time. Five states reported less revenue in FY 2001. State revenues in FY 2002 are expected to grow 2.4 percent over FY 2001 levels. 
• Medicaid, more than all other areas of state spending, is budgeted to grow 8.7 percent in FY 2002. With 40 states reporting, Medicaid will hold the largest percentage of new spending, topping K-12 education (3.7 percent), higher education (3.6 percent) and corrections (3 percent). 
• States will support tax cuts for a seventh straight year; the 2001 net tax reduction is $7.1 billion less than that of 2000. Nine states cut taxes by 1percent or more of 2000 collections, with three of these reducing taxes by 3 percent or more. Four states had tax increases of 1 percent or more, with two increasing taxes by at least 5 percent. Thirty-three states took no significant tax actions; four states did not report. 

State Budget & Tax Actions 2001, complete with charts and graphs, is available through the NCSL website: http://www.ncsl.org/programs/fiscal/presbta01.htm