The latest report from National Governor's Association (NGA) shows the states are modestly trimming their huge budget overhangs after recovering from their spending sprees of the roaring late '90s.
While some particularly profligate states such as California are still digging themselves out of deep budget holes, many are seeing the benefits of their spending restraint as well as a rising economy.
The question now is whether all states have learned this lesson from the long boom of the last decade: Save for rainy days. Or, even better, have a constitutional provision mandating restraint.
States cut budgets by $11.8 billion in fiscal year 2003 and by $13.7 billion in 2002, according to last week's NGA report. Thirty-two states made across-the-board budget cuts, 16 laid off state employees, and 13 consolidated or eliminated departments. Much of that trimming simply took state budgets back to their pre-boom spending levels.
The report projects just a 0.2 percent increase in state spending in fiscal 2004 over 2003 - the smallest since 1979. That marks some of the first good news for states since their revenues dropped precipitously in 2001. And the NGA predicts tax collections will rise again - by a modest 5.1 percent in fiscal 2004. (States saw their tax revenues rise an average 5.9 percent in September.)
Unlike the federal government, nearly all states are required by law to balance their budgets. To achieve that, they've had to raise taxes and fees by $20 billion, and cut spending by $25 billion.
Beyond their own choices in spending, states have been walloped by federal mandates for spending in education and healthcare, a potentially unconstitutional form of taxation without representation.
Without further healthcare reforms, rising costs, particularly in Medicaid, stand to throw more red ink onto state budgets.
The Congressional Budget Office estimates Medicaid spending will increase by 8.5 percent a year, nearly double state revenue growth even after the economic recovery is in full swing.
All 50 states have cut Medicaid payments to doctors and hospitals. Thirty-four states have restricted enrollment; 32 have cut benefits; and 32 states have increased the amount Medicaid patients must pay for medical services and medications.
Still, state spending on Medicare has gone up 23 percent over the past two fiscal years. Some experts say that's not enough to meet demand. The federal Jobs and Growth Reconciliation Act gave a temporary increase in the federal matching rate to states for Medicaid. But that ends in 2005, and states will no doubt face difficult choices.
The budget crisis was a wake-up call for taxpayers to vote for politicians who don't promise them the moon during the good times. Now that a healthy realism has settled on state capitals, the lessons shouldn't be forgotten as the economy picks up steam.