Originally created 05/04/04

Report: State finances doing better, but slow growth poses challenges



The nation's governors are the latest group to document signs of improving finances for their states, but - as they issued a new report Monday - the states' top officials tried to dampen expectations of a quick economic recovery.

The National Governors Association, reporting on state finances in the fiscal year that ends next month and the year that begins in July, found steady signs of improvement. But it also found weaknesses, particularly with Medicaid growth and still-weak cash reserves.

"There are positive signs out there on the horizon, but we would be foolish to believe states can return overnight to where we want to be," said Raymond Scheppach, NGA's executive director.

The group, along with the National Association of State Budget Officers, surveyed state finances nationwide.

Many states reported trends heading in a positive direction:

- Revenues came in on target or better than expected in 39 states.

- State spending has begun to grow, with general-fund spending up 2.8 percent this year and an expected 2.8 percent next year, though still below the 6.2 percent average over the last quarter century. Spending grew 0.6 percent last year, and 1.3 percent in fiscal 2002.

In some ways, the news was only good in comparison to how bad it has been the past few years. For instance, 18 states were forced in recent months to their cut budgets in the middle of the year, saving an overall $4.8 billion - but that was less than half the 37 states that cut budgets each year in 2002 and 2003.

Governors have proposed tax and fee increases totaling $5.4 billion for next year, turning in roughly equal parts to fee increases, cigarette and tobacco taxes, and sales taxes, the report found.

That's down from an estimated $9.6 billion increase in taxes and fees that were approved for the current fiscal year, the report found.

And more worries remain.

Year-end balances, which include rainy-day funds and other reserves, were considered stable but not healthy, the report said. This year's balances, in aggregate, equaled 3.7 percent of expenditures, up from 3.4 percent last year. But next year's balances were projected at only 3.1 percent of spending.

The report said 5 percent is considered healthy to protect against future downturns. Before the economy turned for the worse in fiscal 2000, balances were at 10.4 percent.

Another unresolved problem is the cost of Medicaid and how quickly it has been increasing.

The state share of Medicaid spending is projected to be back at double-digit growth next year, at 12.1 percent. This year's growth of the state share of the state-federal health care program for the poor was kept to 4.6 percent, but only because of the $20 billion federal bailout approved last year to help states.

Overall, one big worry is that pent-up demands for state services, and the growth in health care costs, will outpace the states' slow growth.

"Despite some improvements in the states' fiscal situations, the picture is far from rosy given the unprecedented strain of the last three years," said Scott Pattison, executive director of NASBO.

On the Net:

National Governors Association: http://www.nga.org

National Association of State Budget Officers: http://www.nasbo.org