Tighter Fiscal Conditions Ahead For US States

by Leroy Baker, Tax-News.com, New York

08 June 2007

While states experienced stable finances in 2007, somewhat tighter fiscal conditions are expected in 2008, according to the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

In a report released earlier this week, entitled 'The Fiscal Survey of States,' NGA and NASBO found that while most states expect reasonable revenue growth during fiscal 2008, some states already are seeing significant slowing of their fiscal conditions. States expect continued expenditure pressures in areas such as health care, education, corrections, employee pensions systems and infrastructure.

In fiscal 2007, state general fund spending growth was 8.6% — approximately two percentage points above the 29 year historical state spending average of 6.5%. Five states, however, reported negative expenditure growth, and 6 states reported negative growth in the governors' recommended budgets for fiscal 2008.

"The steady rise in health care costs continues to be a dominant force of increased state spending," observed NGA executive director Raymond C. Scheppach. "Governors realize that meeting these ever-increasing expenditure expectations with limited revenues will be problematic in the future."

Medicaid accounts for approximately 22% of total state spending, while all health care accounts for 32% — the single largest spending area. Thirty-four governors introduced proposals to reduce the number of uninsured residents in their states during fiscal 2008. These included expanding the State Children's Health Insurance Program, increasing individuals' access to private insurance, and using traditional Medicaid expansion and flexibilities offered under the Deficit Reduction Act, along with various other state programs. Proposed fiscal 2008 funding for these programs totals nearly $18.4 billion.

In fiscal 2007 state revenue collections, 27 states exceeded their original budget projections. Revenue projections were met in 14 states, while 9 were below budget projections. Revenue collections were 2.4% higher than original estimates — corporate income taxes were 10.9% higher, personal income taxes were 2.4% higher, and sales taxes were 0.6% higher. Revenues in fiscal 2008 governors' recommended budgets are projected to grow by 3.3%. Forty-one states have proposed tax and fee changes for fiscal 2008, totaling a net increase of $4.5 billion.

"This report demonstrates that most states are still in good financial shape, but some are expecting their revenue and spending growth to decline somewhat over the next year or two," observed NASBO executive director Scott D. Pattison. "We expect a handful of states to begin experiencing more difficult fiscal times."

Total year-end balances — ending balances and the amounts in budget stabilization funds — are a critical tool in balancing revenues with expenditure demands during depressed fiscal times, and currently show healthy balances. For fiscal 2008, the report shows an expected decline. Total balances in fiscal 2006 were $62.1 billion, or 10.9% of expenditures; in fiscal 2007 total balances were $50.4 billion, or 8.2% of expenditures. In fiscal 2008, balances are projected to decline to $38.7 billion, or 6% of expenditures.

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