Hold off on cutting police and school band

States are cautiously optimistic on budgets as revenues rise. But they're not going on spending sprees yet.

Three years after they got hit with a double dose of trouble - nationwide recession and the psychological wallop of the 9/11 terrorist attacks - states are rediscovering economic solvency. From Oregon to Massachusetts, revenues are up and budgets are easier to balance, relieving some of the pressures to cut school programs and other services that taxpayers have gotten used to.

"The recent state fiscal turmoil is starting to recede," the National Governors Association reports. That doesn't mean state houses are back in fat city, however - just that most budget cutting has moved from draconian to more manageable levels. Two years ago, for example, 37 states had to cut their budgets a total of $12.6 billion; for fiscal year 2004, 18 states cut budgets a total of $4.8 billion.

Unlike the federal government, most states must pass budgets in which spending and revenues are in balance. For 46 of the 50 states, the current fiscal year ends June 30.

While the economic recovery takes a while to have a positive effect on state revenues and therefore the programs those revenues support, 32 of those 46 states now anticipate budget surpluses for the 2005 fiscal year that begins July 1.

State government revenues have grown (beyond inflation) for three consecutive quarters, a clear sign that revenue growth is returning to pre-recession levels. Still, it's too soon for governors and state lawmakers to sing "Happy Days Are Here Again."

"While the curve is now clearly headed upward, it may still be years before the states have as much real revenue as they had before the recession," the Nelson A. Rockefeller Institute of Government at the State University of New York reported recently. As a result, the researchers found, "the budget debate still features spending reductions and tax increases."

Amid hope, tough choices remain

Though sales and corporate income taxes are growing, most of that revenue increase comes from the personal income tax. This reflects a strengthening economy, especially in places like the Pacific Northwest, where record-high unemployment rates have started to drop as people return to work and some new jobs are created.

Though its unemployment rate is still a relatively high 6.8 percent (down from 7.5 percent in March), Oregon is experiencing the highest job growth in four years. Next door in Washington State, employment will reach pre-recession levels by the end of the 2004, officials reported last week. In the bistate Portland-Vancouver metropolitan area, the number of unemployed persons is 24 percent lower than it was a year ago.

"The strengthening economy is great news for citizens," says Washington State budget director Marty Brown. "But their state budget is still not out of the woods. We will have to make difficult choices."

Other experts echo this cautious optimism.

"While the hangover from the budget crisis of the last two years has not completely dissipated, there is now reason to hope that there will be no more bad news from the revenue side of the budget equation," the Rockefeller Institute reports. "At least for now."

Some states are balancing their budgets by hiking "sin" taxes - directly on alcohol and tobacco, and indirectly though more reliance on state-sponsored gambling. North Dakota joined the "Powerball" multistate lottery, Maine now allows slot machines at race tracks ("racinos"), and Iowa will issue more casino licenses.

But for the most part, increasing state revenues have yet to translate into spending hikes for government services.

"Spending growth remains weak and the recovery continues to be uneven" says Scott Pattison, executive director of the National Association of State Budget Officers. "To balance their budgets in fiscal 2004, states ... used a combination of layoffs, furloughs, early retirement, reductions to local aid, reorganization of programs, and a variety of other methods."

The new math of healthcare reform

Fifty-four percent of state budgets consist of just two items: education and Medicaid, the low-income healthcare program. And of those two, only education is discretionary - meaning that state lawmakers and governors can (and have) cut state funding to the point where some school districts have had to eliminate programs or reduce the number of days school is in session.

But Medicaid is mostly mandatory. As demographics change, Medicaid costs to states have been increasing at more than 10 percent a year.

Writing for Stateline.org, a nonprofit online news organization that reports on state government, National Governors Association executive director Raymond Scheppach says, "The existence of a federal entitlement healthcare program that states administer and partially fund, but have limited ability to control costs, creates a serious bias in state budget priorities."

That means that Medicaid and national healthcare reform must become a national priorities, says Dr. Scheppach. Intended or not, such an assertion has heavy political overtones in an election year.

State economies and budgets are sure to be a factor in the presidential race, especially in swing states like Oregon. Here, George Bush's supporters say the administration's policies have helped jump-start the economic recovery.

Officials with the campaign of presumptive Democratic nominee John Kerry point out that there were nearly 24,000 personal bankruptcies in the state last year - 42 percent more than in the last year of Bill Clinton's presidency.

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