State finances: Revenues up but so are spending pressures
State revenues are coming in stronger than predicted nearly everywhere but costs are zooming ahead of forecasts in more than half the states, leaving legislators in an awkward spot — pleased with the latest finances but worried about the future.
So far, the healthier revenues are allowing states to balance their accounts, but the increased spending signals wider problems in the next fiscal year, according to the National Conference of State Legislatures’ latest quarterly accounting of state finances. Most places begin their fiscal year on July 1
“This is a fragile time for state budgets,” NCSL executive director William Pound said. “Persistent budget gaps and longer-term structural concerns are evidence of ongoing state fiscal problems.” Federal efforts to shift costs to states — particularly for Medicaid, the program that provides health care to the poor — could result in a lot of red ink, he added.
For state legislators who begin four days of discussions in Washington on Thursday, the current financial landscape is a mix of good and bad.
Signs of economic improvement are clear, with tax revenues up steadily for more than a year and hopes that tax agencies will have even more good news after the all-important filing deadline Friday.
While those are undeniably steps in the right direction, they don’t erase the previous years of falling revenue, spending cuts and borrowing, analysts said.
“Even with the revenue growth, we’re only now coming back to where we were before” when the economy turned down in 2001, said Harley Duncan with the Federation of Tax Administrators. And in those years, populations and costs have risen.
“We’ve fallen behind,” he said.
The report found:
— Spending overruns popped up in 31 states, with most of the problems coming from Medicaid costs and other health care programs. The healthy revenue has allowed states to cover those unexpected costs.
— Strong revenues have spurred 34 states to revise their financial forecasts. Overall, all the major categories of revenue are up — sales, income and corporate income taxes — though not in every state.
— Budget gaps are only a problem in three states in the fiscal year that ends, for all but four states, in June. But for the year that begins in July, 26 states say they’ve already identified a gap between the spending needs projected by government agencies and the money government expects to bring in. NCSL estimated the gap at $26.9 billion nationwide, though budget deliberations by law must resolve the differences.
“There’s this expectation that we’d grow out of the difficulties of the last few years. That’s just not the case,” said Corina Eckl, NCSL’s fiscal affairs director. “Look at the endless pressures for Medicaid and K-12 education. It doesn’t look like those pressures are going to end anytime soon.”
Those problems haven’t sparked a widespread push for new taxes across the country, though there have been some notable exceptions: GOP Gov. Mitch Daniels of Indiana called for a temporary tax on the wealthy (the Legislature did not support it) while Colorado’s voters may be asked to decide whether to revamp their constitutional amendment limiting tax increases.
Some legislators argue that now, with revenues improving, is when government must remain tightfisted. “It’s too much money from a fiscal conservative perspective,” said Iowa House Speaker Christopher Rants, a Republican. “It’s very easy to say yes when new money’s coming in. Too many people are saying yes.”
Others say that citizens are getting fed up with the inability of state government to keep up with the demand for services.
“We’re still living with that hangover from the ’90s,” said Wisconsin state Sen. Bob Jauch, a Democrat. “We’re digging very slowly … out of the mess when the Legislature lowered taxes and increased spending in the days that they thought prosperity would last forever.” The state faces a $1.6 billion deficit over its two-year budget period.
The larger problem driving state budget problems is that the tax systems are built for a manufacturing-heavy economy, rather than the 21st century economies fueled by services, information and high-technology. Add to that the reluctance to change the system, and states are ailing.
“The argument boils down to what government should be providing,” Eckl said. “And ultimately that depends on what the people are willing to pay for.”
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On the Web:
National Conference of State Legislatures: http://www.ncsl.org