Report: State budgets show initial recovery signs

After three straight years of the fiscal blues, state budgets may begin to improve slightly in the coming months as the national economy slowly improves, according to a survey released this week by the National Governors Association and National Association of State Budget Officers.

The biannual report, "The Fiscal Survey of the States," found states pared back spending significantly in fiscal 2003 and 2004 to balance their budgets, and that revenue collections at the beginning of fiscal 2004 were sluggish, although they recently have begun to improve in some states.

"Our findings demonstrate that states have had to contend with a very difficult fiscal situation for three years now," said Scott Pattison, NASBO's executive director. "Spending growth has been virtually flat for the last three fiscal years."

The unprecedented situation has left states with no choice but to make significant budget cuts, he said.

"Positive economic news will hopefully translate into positive revenue growth, but sates can expect to have to deal with tough economic times for the rest of the fiscal year, and perhaps into fiscal 2005," Pattison said.

Based on fiscal 2004 appropriations, expenditures are expected to rise only by 0.2 percent over the previous year, according to the report.

Among the reports other findings:

*13 states enacted negative growth budgets in fiscal 2004

*21 states had lower general fund spending in fiscal 2003 compared with the previous year

*40 states reduced fiscal 2003 enacted budgets by $11.8 billion after they were passed, which was two states more than the previous year

Moderate growth will begin to occur in states in the one or two quarters, but the recovery will be uneven with some states lagging behind others, said Ray Scheppach, NGA's executive director.

"We may have bottomed out, but we're not out of the woods yet," Scheppach said. "States continue to struggle with short-term cyclical and long-term structural problems."

The structural problems are a direct result of obsolete tax systems, he said. Some states, such as Alabama and Virginia, are attempting to overhaul their tax systems as a result.

The Washington-based associations found states continuing to struggle to balance their budgets amidst soaring health care costs and stagnant revenue growth. In order to combat budget pressure, states have ratcheted down expenses both through across the board and targeted reductions to a wide array of programs.

While several states have exempted K-12 education from cuts, many of the most politically sensitive areas have not been spared the budget ax, according to the report. Forty states made either across the board or selective program cuts in fiscal 2003. The cuts totaled $11.8 billion, second only to fiscal 2002, when 38 states cut their budgets by nearly $13.7 billion.

Thirteen states, including Iowa, Virginia and Washington, have launched major governmental reorganizations to balance their budgets and drive savings, Pattison said.

The report is based on data reported by the states on their general fund budgets. State fiscal years run from July 1 to June 30. The survey on which the report is based was conducted by NASBO between July and November.