State Fiscal Conditions Strong
State fiscal conditions continued to improve in fiscal 2006, according to the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).
In a report recently released, The Fiscal Survey of States, NGA and NASBO found increased revenues and strong budget reserves, which enabled states to offer tax cuts, increase funding for programs and replenish budget stabilization funds. States remain mindful, however, of projections for more modest growth in 2007 and expenditure pressures that include the pent-up demand of previously cut programs, budgetary strain imposed by Medicaid and issues such as pensions, demographic shifts and infrastructure.
“It is a good time to be governor,” said NGA executive director Raymond C. Scheppach. “The stable, healthy fiscal condition of states across the nation affords current governors options their predecessors did not experience. Governors are better-positioned to prepare their states for long-term spending pressures from structural deficits in Medicaid and rising health care costs.”
State general fund spending grew by 8.7 percent in fiscal 2006—significantly higher than the 29-year average of 6.4 percent. In fiscal 2006, only two states made mid-year budget cuts. Three states reported negative budget growth for fiscal 2006, and four states enacted negative growth budgets for fiscal 2007—in sharp contrast to fiscal 2003 when 21 states enacted negative growth budgets.
“States have now effectively rebuilt their rainy day funds and spending is somewhat above average so that states have provided some limited tax cuts as well as bolstered programs that had previously been cut during the lean years. The question state finance officials are asking is whether the state fiscal situation is peaking for this cycle,” said NASBO executive director Scott D. Pattison.
In state revenue actions, states enacted net tax and fee decreases of $2.1 billion in fiscal 2007. Twenty-four states adopted net decreases, while 15 enacted net increases. Continuing the trend of recent years, the largest enacted net decrease was in personal income taxes, and the largest net enacted increase was in sales taxes.
State revenue growth was strong, with fiscal 2006 revenues exceeding expectations in 46 states and on target in four states. Revenues were 5.9 percent higher than originally estimated—sales taxes were 2.3 percent higher, personal income taxes were 6.6 percent higher and corporate income taxes were 20.5 percent greater. Looking ahead, states budgeted for more moderate revenue growth in their fiscal 2007 budgets. Compared to actual fiscal 2006 collections, enacted fiscal 2007 budgets reflect 3.5 percent more in sales tax revenue, 4.0 percent more in personal income taxes and 4.0 percent less in corporate income tax revenue—a 3.0 percent overall increase from fiscal 2006.
Total balances—ending balances and the amounts in budget stabilization funds—are a critical tool on which states relied heavily during the recent fiscal downturn and continued to rebuild in fiscal 2006. Total balances were $47 billion—or 8.4 percent of expenditures in fiscal 2005; in fiscal 2006 total balances were $59 billion—or 9.8 percent of expenditures. Based on fiscal 2007 enacted budgets, balances are $44 billion. Fiscal 2006 ending balances as a percentage of expenditures ranged from 0 percent to 73.8 percent. Balances are expected to decline some during FY 2007 with a current projection of 6.8%.
This edition of The Fiscal Survey of States reflects actual fiscal 2005, preliminary actual fiscal 2006 and appropriated fiscal 2007 figures. The data were collected during fall 2006.