How Flush States Share the Wealth

Strong economy creates surplus in 21 states

RESIDENTS of Georgia may soon enjoy groceries tax-free. Arizonans will get a break on property and business taxes. Utah will reduce first-grade class sizes, while California schoolchildren are going to receive new textbooks.

In an era of fiscal penury, many states are suddenly finding themselves in an enviable position - enjoying budget surpluses.

Aided by an extended economic recovery, legislators and budget officials are huddling to make the kinds of decisions many haven't had to make since the 1990s began: what to do with extra revenue.

''This has been a very good year for the states,'' says Arturo Perez, policy specialist for the National Conference of State Legislatures (NCSL). ''More than any time this decade, they have excess revenue to consider.''

Still, as the 1995-96 fiscal year crosses midpoint, don't look for big-ticket expenditures like new interstates or fancy state office buildings. Because of uncertainty about Washington's plans to balance the budget and thus curtail federal support to states, the surpluses - averaging just under 2 percent of total budgets - are being spent conservatively.

''We are putting 77 percent of our surplus away in anticipation of federal cuts and changes in the economy,'' says Minnesota State budget director Judy Johnson.

Minnesota reflects the most typical strategies on the horizon: increased rainy-day funds, corporate- and property-tax relief, and infrastructure upgrades.

In addition to the fact that most regions of the country eased out of recession last year, the surpluses are showing up because of the strong drive in recent years to reduce the size, scope, and thus cost, of government.

Legislators are also learning the political value of underestimating how much revenue will come in. ''Years of recession have burned so many people that they have become very conservative in their estimates,'' says Claire Cohen, director of Fitch Investor Services, a ratings firm for municipal and state finances in New York. Noting that most states have statutory provisions that frown heavily on deficits, ''officials are trying to make double sure they don't get in hot water,'' she says.

That prudence has paid off, according to an NCSL survey released Jan. 18. Despite 1995 tax cuts in 30 states, 22 are exceeding revenue expectations for the 1995-96 fiscal year, 18 others remain on target, while only 10 are below projection.

''In general, the West is strongest, while New England and Mid-Atlantic states are still struggling,'' says Stacey Mazer, analyst for the National Association of State Budget Officers.

In California, for instance, Gov. Pete Wilson (R) recently proposed a 15 percent tax cut on the heels of a $688 million surplus. Officials are socking away funds to make up for losses incurred over five years of recession. And for the first time since 1990, grade schools will get a boost of nearly $350 million. ''This is great news that at long last schools will benefit from more money,'' says Dan Rabovsky, principal analyst for the state legislature.

A business boom in Utah will help fuel tax cuts, make transportation and infrastructure upgrades, and reduce class sizes, according to Leo Memmott, director of Utah's office of legislative fiscal analysts. Arizona's building boom will produce at least $200 million in lowered property taxes and $50 million for schools.

And even after putting most of its $820 million surplus into savings, Minnesota will have $200 million left over for new technology, a teen crime-prevention program, and community policing.

But observers caution that plans could be derailed, depending on how the federal budget impasse is resolved in Washington. ''This is one of the longest wait-and-sees we've ever had,'' says Ohio budget director Greg Browning. ''Short-term we're OK; if things reach past March, we're looking for trouble.''

STATES that are registering red ink so far for fiscal year 1995-96 are already in trouble. Hawaii's second straight year of slowed tourism has left it with sluggish excise-tax collections. Alaska's dwindling oil sales - which provide 85 percent of the state's income - have left it looking for ways to make up a $500 million shortfall.

With such examples fresh at hand, an overall fiscal conservatism - despite this year's good news - is positive, say observers, who claim the recent turnaround is cyclical. ''We don't see this trend of budget surpluses to be long term,'' says David Liebshutz, associate director of the Center for the Study of the States in Albany, N.Y. Predicting a slower growth rate in 1996 than 1995, he says: ''If the economy slows down much further, or if the federal government chooses to limit block grants to states, this trend could reverse itself.''

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