Fiscal checkup finds state budgets healthy

With revenues improving in fiscal 2005, many states began restoring funding to programs cut during the recent economic downturn and have returned year-end fund balances to almost normal levels, according to a report released today by the National Governor's Association and the National Association of State Budget Officers.

But states are still feeling the budgetary pinch from Medicaid, pensions, a growing school-age population and infrastructure needs, according to the Fiscal Survey of the States.

Overall, state revenue growth is strong, with all states meeting or exceeding budgeted estimates for sales, personal income and corporate income tax collection, the report states.

Revenue collections were 4 percent higher in 2005 than anticipated. Sales taxes were up 1.2 percent, personal income taxes were 5.7 percent higher and corporate income taxes were 11.6 percent over estimates, according to the report.

Strong revenue growth is allowing states to rebuild budget reserves to levels at or above those considered adequate by budget observers?roughly 5 percent of expenditures. Those reserves were a critical tool for weathering the recent fiscal downturn and are a bellwether of state fiscal health, the report states.

Total balances for all states, composed of ending balances and the amounts in budget stabilization funds, are $38.5 billion, or 6.8 percent of expenditures. That is an increase from 2004, when total balances were $26.7 billion, or 5 percent of expenditures. Balances are expected to decline though, to 4.6 percent in 2006, according to the report.

State general fund spending grew by 6.7 percent in 2005, just above the 28-year average of 6.5 percent. Increased spending on programs cut during the downturn, an increase in state funds following a one-time boost from the federal fiscal assistance package and general program expenditure increases contributed to the above average growth rate, the report states.

But the single largest problem for states remains healthcare spending, particularly for Medicaid. According to the most recent survey by the Kaiser Commission on Medicaid and the Uninsured, Medicaid spending increased by 7.5 percent in 2005.

Twenty-two states experienced Medicaid shortfalls in 2004, ranging from 0.2 percent to 11 percent of program costs. Twenty-six states anticipated shortfalls in 2005, even though every state has implemented some measure to control such spending, including supplemental funding and cost containment measures, according to the report.

Despite the pressures of paying for healthcare, the report reflects fiscal improvement by states in 2005. Only five states made across the board budget cuts in 2005, unlike recent years when nearly every state did so.

The survey assembles self-reported data by states on their general fund budgets, which states use to finance most programs and services, and is an important indicator of a state's overall fiscal health.