Tough Economic Times Remain for States

With the next fiscal year underway or looming, budget data recently released by the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) indicate that states continue to struggle with declining revenues amidst an uncertain economy. The latest Fiscal Survey of the States shows most states are unable to protect their highest priority programs from budget reductions.

Fiscal 2003, which ended June 30 for most states, was a grueling year for the majority of the nation's governors, the Fiscal Survey observes. Based on state budget data collected during spring 2003 by NASBO, most governors chose spending reductions coupled with revenue increases and drawing down their remaining reserve funds to balance budgets. Thirty-seven states were forced to reduce already enacted budgets by nearly $14.5 billion — the largest spending cut ever recorded by the 27-year-old survey.

Governors in 29 states recommended tax and fee increases in fiscal 2004, resulting in a net increase of $17.5 billion — the largest since 1979. Furthermore, state spending growth was cut to only 0.3 percent in fiscal 2003 and is expected to decline 0.1 percent in fiscal 2004. Survey data show governors used a wide variety of budget management tactics to balance their budgets in fiscal 2003:

• 28 states used across-the-board cuts;
• 22 states drew down their rainy day funds;
• 17 states laid off employees;
• 8 states offered early retirement; and,
• 10 states reorganized agencies and programs.

A variety of other measures were used in 29 states, including refinancing state debt, hiring freezes, tobacco settlement securitization, deferred payments, and fund transfers.

"Governors have reigned in spending over the past two fiscal years, with most states reporting growth rates less than the previous years," said NGA Executive Director Ray Scheppach. "The trend will continue next year - a record high 19 states have proposed negative growth budgets."

Seven states – Alabama, California, Connecticut, Michigan, Nevada, New Hampshire and Oregon – are still wrestling with their FY 2004 budgets. A few other state legislatures are taking up their governors' line-item vetoes this month.

Perhaps the greatest indicator of fiscal pain and potential long-term vulnerability is the near total decimation of state reserve funds or "rainy day" accounts. Total balances peaked in fiscal 2000 at $48.8 billion, but they are estimated at only $6.3 billion for fiscal 2003. Total balances for actual fiscal 2002, estimated fiscal 2003, and recommended fiscal 2004 all fall below levels considered to be an acceptable fiscal cushion, the authors state.

Fiscal Survey of the States comes with tables presenting each state's fiscal condition and is available from http://www.nga.org or http://www.nasbo.org.