Though revenues up, states stay thrifty

Oregon state employees will probably see a thaw in their multiyear salary freeze. California and New York will plug billion dollar holes left by depleted cash reserves since 9/11. New Jersey, Hawaii, and Oklahoma will sink big bucks into higher education facilities that have been neglected for five years.

Continued recovery of the US economy and more cautious budgeting by state officials - burned by overestimating revenues for several years - have brought about a rebound in the fiscal fortunes for 48 states that have been sagging since 2001. Personal and corporate income taxes, sales taxes, and capital gains on stock options are the sources of the newfound revenue.

But rather than rushing out to re-fund all the on-going programs they have had to slash over four years, or tackle long-term spending projects, most states are treating the current revenue boost as a momentary breath of fresh air rather than a new, prevailing wind.

Instead they plan funding for one-time-only projects like buildings or bridges, paying off debts or socking money away for anticipated shortfalls next year.

"The situation for the states right now is like a father who gets a long-awaited raise at the office, and then comes home and finds out his daughter just got accepted to Harvard," says Scott Pattison, executive director of the National Association of State Budget Officers.

Yet steady increases in costs of Medicaid, healthcare, education, and prisons continue to have states on edge. Many are also wary that some of the boosts that have helped fuel the current turnaround, such as booming housing markets in several states, will bottom out.

"Revenue has turned around, but expenses are still tight and getting tighter," says Mr. Pattison. "Finance people are welcoming it with open arms. At the same time they feel it is probably not sustainable, and so are acting accordingly."

The list of reasons that revenue increases are "probably not sustainable," analysts say, includes volatile energy prices, low consumer-spending confidence, the economic drain of the Iraq war, and worries about a possible drop in housing prices.

"Over the past few years we've seen such huge equity increases in home values that people have felt comfortable and wealthy ... and so they buy things, which has helped fuel sales taxes," says Nick Jenny, fiscal analyst for the Rockefeller Center for Study of the States. "If that wealth effect declines because the housing market softens, states might no longer enjoy the same indirect effect on sales-tax revenues."

Idaho is particularly concerned about a housing bubble burst, since revenues for the current fiscal year have exceeded estimates by 10 percent.

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