Big state surpluses: a thing of the past?

After years of bounty, states are now seeing a slowdown, which could mean leaner times ahead.

Legislators and governors returning to America's statehouses this week will face the most sobering fiscal news in a half decade: shrinking revenues.

For the first time since 1995, lower forecasts for state tax income from all sources - individuals, corporations, and sales - are down, setting off a domino effect of uncertainty as officials try to forge budgets for 2001 and beyond.

The reasons for the switch range from the slowing US economy to the rise of healthcare costs. And while most states expect only a modest downturn, the projections are causing more-than-usual caution because they come after years of robust growth, in which most states have become accustomed to huge surpluses.

"States are seeing evidence from every direction that economic slowdowns are afoot," says Donald Boyd, state tax analyst at the Rockefeller Institute of Government. "It is clearly going to impact policies on everything from tax cuts to spending increases."

Although the overall US economy is continuing to expand, the rate of expansion is slowing. There are also economic warning signs: a seesawing stock market, lower consumer spending than in recent years, and declining indicators - from gross state product to home sales and manufacturing slowdowns.

Region by region

The impact of the revenue shrinkage, in many cases, varies by region. It is hitting the industrial Great Lakes region more than the West, for instance. Nationwide, though, budgets will be more challenging to balance and more programs will come on the chopping block.

All of this takes place after years of surpluses, in which states have expanded services, cut taxes, and socked money away into rainy-day funds.

"When things hit even a period of slight uncertainty, the conservatism kicks in because no state wants to be caught short in the future," says Stacey Mazer, acting director for the National Association of State Budget Officers.

About half the states responding to a recent NASBO survey said they now assume general-fund revenues for the next fiscal year (2002) will be lower than previously estimated.

Sales-tax revenues began to decline several months ago, reversing a 1-1/2-year trend. In general, drops in sales-tax revenue tend to cramp government finances more quickly than other sources, such as income taxes.

"We are definitely seeing a bit of a slowdown," says Jim Ramsay, Kentucky state budget director.

He cites the same problem the national experts do - a skittish stock market making people wary to spend and leading to a drop in sales-tax revenues. But he adds a few others. For one, the rise of Internet "e-tailing" has also hurt sales-tax revenues. And businesses have gotten better at tax planning, which means they've minimized their tax load.

"Our sales tax is not growing to meet our expectations," says Mr. Ramsay. "So we are cutting back our estimates of what programs we will fund and at what cost."

The growing cost of Medicaid is another concern for states. The program represents about 20 percent of most state budgets, and half the states report costs exceeding estimated budgets. Many forecast double-digit increases for the foreseeable future.

"Medicaid has become a key issue," says Arturo Perez, analyst for the National Conference of State Legislatures. "Higher prescription-drug prices and growing enrollment lists are ratcheting up payouts."

Ohio and Medicaid

Ohio is one state running into significant challenges because of Medicaid. It set up a large rainy-day fund during the past decade, but Medicaid payments have recently become a major fiscal bur-den. The state legislature has already passed a bill appropriating $650 million in additional funds for Medicaid.

"That is a huge expenditure for us," says Timothy Keen, assistant budget director for Ohio. "Our Medicaid program had been running at historical lows for four to five years, but that began to change last year.... We suddenly had more people than estimated showing up for the program, and mostly in categories which cost more than estimates."

Because the national economy remains essentially stable, and some large states report revenue increases, analysts caution that undue concern is unwarranted as yet.

Officials in states such as California, Massachusetts, and Michigan say they're doing well because of good planning.

"We are seeing a slight slowdown but still meeting projections because we made a decision to control our base spending levels several years ago," says Kelly Chesney, spokeswoman for the Michigan state budget office. With $1.2 billion set aside in their rainy-day fund, officials there have paid off past debts and reduced taxes. "We are continuing to position ourselves for what we see as the coming downturn," says Ms. Chesney.

But everywhere, the watchword is caution. "No one is yet declaring any major emergencies, but the general feeling is that this is a time to settle in and be watchful," says Mr. Perez.

(c) Copyright 2001. The Christian Science Publishing Society

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