Ugly Fiscal Crisis for States Getting Uglier

The need for the creation of high-wage jobs through tech-based economic development continues to grow at a time when many states are finding it increasingly difficult to make the necessary investments to be true players in a knowledge-based economy.

At a time when most states begin preparing budgets for fiscal year 2004, further cuts are required to balance the current year's budgets in nearly half the states. Comparisons to the Great Depression of the 1930s have slipped into some of the discussion of just how severe the crisis is for most states.

Whether one uses the collective shortfall of $17.5 billion that was reported in the National Conference of State Legislatures (NCSL) 50-state survey, or the $8.3 billion figure that 23 states must cut from current spending that was reported in Fiscal Survey of States, the situation for FY 2003 is critical. Fiscal Survey of the States, which was issued jointly by the National Governors' Association and the National Association of State Budget Officers in late November, includes several tables presenting each state's fiscal condition in sad detail.

The current outlook is particularly hard for states given the year they just came through. In FY 2002, sales tax collections were 3.2 percent lower than originally budgeted, personal income tax collections missed states' targets by 12.8 percent, and corporate income taxes were a staggering 21.5 percent lower than projected. Forty-one states collected less revenue in fiscal 2002 than they had planned for in their budgets. Sixteen states experienced negative growth in revenues in fiscal 2002.

Quick fixes to get past last year's squeeze — actions that included selling off states' entire tobacco settlement funds and draining state "rainy day" accounts so they'd be depleted from cloudy days with periods of light drizzle — have left states little room to negotiate through the continuing period of declining revenues and increasing expenses related to Medicaid, homeland security, and K-12 education. Medicaid expenses alone grew 13.2 percent in 2002, while state cash balances have dwindled more than 70 percent since 2000.

As a result, the Fiscal Survey of States discovered states have enacted the greatest increases in revenues since 1992. Most revenue enhancements came through hikes in sin taxes for items such as cigarettes and alcohol and by increasing fees.

Challenges for 2004 are further complicated by the fact that this is the first budget cycle for 24 new governors and 24 percent of the states' legislators. Campaign promises of new initiatives and no tax increases will meet the harsh reality of the current fiscal environment requiring deeper cuts, hiring freezes and layoffs.

In addition, the Bond Buyer reported on Nov. 26 that bond ratings are threatened to be or already have been downgraded for several states because of the states' fiscal stability. The article states Moody's has put a negative outlook on 15 states' general obligation ratings.  A Nov. 29 New York Times story pointed out that five of the eight states that used all or a portion of tobacco settlement funds to balance their 2002 budgets already have had their ratings lowered, making future bonds more expensive to those states.

More information on the NCSL survey is available at http://www.ncsl.org. Fiscal Survey of the States is available from http://www.nga.org or http://www.nasbo.org.