States' bottom line improves, but can the good news last?

This year, many states are receiving their first bit of good economic news since the beginning of the recession. More than half of them will take in more revenue than they expected, and a handful are reporting surpluses, according to one study. Several other reports point to the same trend: states' 2011 budgets heading in the right direction as tax collections increase.

Yet the reports come with a distinct "however." Stock market volatility could hit hardest those most responsible for rising tax revenues – corporations and the rich – and some states used budget-balancing gimmicks last year that they can't use again.

Moreover, states appear to be caught in the middle, with the federal government cutting the spending and stimulus that bolster state coffers, even as the rolls for caseload-driven programs like Medicaid are increasing. Adding to that pressure, localities will be looking to states for help as property taxes lag.

"Bottom line: State revenues are improving, but not enough to meet budget demands," says Corina Eckl, head of the fiscal affairs program of the National Conference of State Legislatures (NCSL). "It's like getting a 5 percent raise but finding out that your rent went up by 10 percent."

Still, any good news is welcome news for states.

•Tax collections exceeded expectations in at least 28 states, reports the Center on Budget and Policy Priorities (CBPP). In 23 states, the primary reason was "gains in income tax collections – a result of rapid increases in the incomes of wealthy individuals and corporations over the last year," a July 11 study states.

•The Nelson A. Rockefeller Institute of Government reported in July that "total state tax collections ... showed growth for the fifth consecutive quarter, following five straight quarters of decline." The numbers for the first quarter of 2011 were 9.3 percent better than the same quarter last year, it added.

•In March, NCSL noted that "state finances are showing encouraging signs of revenue stability," though it cautioned that "budget gaps remain a daunting obstacle for some states."

•The National Association of State Budget Officers concurred in its spring fiscal survey. "State fiscal conditions in fiscal 2011 are somewhat improved when compared to the difficult fiscal environment that states faced in fiscal 2009 and fiscal 2010," it said.

Among the states forecasting a surplus, however, there is little celebration.

Most of the surpluses are small compared with overall budgets, and many state budget officers are cautious in anticipation of serious fiscal challenges ahead.

Ohio wouldn't have a surplus at all if it weren't for $6 billion in federal stimulus money, which is ending, says Tim Keen, director of the state's Office of Budget and Management. Ohio has already earmarked the $246.9 million surplus – less than 1 percent on a budget of $27.8 billion – for a rainy day fund.

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