by Corina Eckl
Much has been made about the current state fiscal situation and robust revenue performance of late. But is this much ado about nothing?
It's absolutely accurate to say that state fiscal conditions have improved since the latest fiscal crisis. According to the Rockefeller Institute of Government in Albany, state revenue shows broad strength, and NCSL's latest fiscal report shows that state year-end balances are rising. But today's situation needs to be put into a broader context: where states have been and where they're headed. If the past is the best predictor of the future, states have a lot to be worried about.
While the most recent economic downturn wasn't especially prolonged or deep by historic standards, it took a harsh toll on states. The astounding revenue collections that marked the late 1990s took a nosedive in 2001, leaving many states with year over year revenue losses. Many state officials reported the worst revenue situation since the Korean War or World War II. States with high reliance on personal income taxes were particularly hard hit. And because states operate under balanced budget requirements, lawmakers had to make difficult decisions. They cut spending nearly across the board, delayed or canceled infrastructure projects, postponed maintenance, delayed payments to schools, tapped reserves and, to a lesser extent than in previous recessions, raised taxes and fees.
Now that the fiscal situation has improved, states are taking advantage of strong revenue performance to "undo" some of the actions they took in recent years. They are:
- Restoring funding to programs that had been cut during the state fiscal crisis;
- Replenishing rainy day funds and other state reserves;
- Repaying money borrowed from other state accounts;
- Reversing one-time actions to save money (e.g., accounting changes) or ones to raise additional revenue (e.g., accelerating tax collection schedules);
- Investing in infrastructure projects likes roads, veterans homes, emergency management centers and higher education facilities, among others.
Place on top of these priorities the enormous fiscal pressure from rising health care costs, including Medicaid, newly identified funding liabilities for retiree health care, public safety expenses, and unfunded pension obligations, among others, and the fiscal challenge becomes clear.
While the media and others (like Congress and the Administration) are focusing a lot of attention on today's state fiscal situation, they should not use data from a single year (or even two years) to make longer-term assumptions about the health of state budgets. Legislative fiscal directors around the country have told NCSL that while state revenue performance is good right now, longer-term budget concerns are looming. In fact, as many as 20 states forecast structural deficits (revenue growth insufficient to cover spending obligations) as early as FY 2008. The current fiscal situation might delay that development, but likely will not avert it.
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