States Emerge From Economic Downturn

SALT LAKE CITY – Most U.S. states appear to be emerging from the economic downturn, a new report measuring the health of their budgets shows. But that doesn't mean states will celebrate with wholesale spending sprees, experts say.

States wound up the fiscal year in June with a collective ending balance of more than $6 billion more than this time last year, according to a survey by the National Conference of State Legislatures (search), released during its annual meeting Tuesday in Salt Lake City.

But the report says it's not all good news since those balances are expected to fall at the end of this fiscal year after a one-time gift from the federal government runs out.

"It's a mixed bag," said Corina Eckl, NCSL's senior fiscal analyst. She said that while 2004 was better than expected, there are "still some serious concerns."

The report is based on data compiled in July from 44 states, where year-end balances collectively went from $12.2 billion to $18.4 billion this year. The report found 26 states had balance increases, but 18 saw declines.

The six states not included in the report because they have not passed fiscal year 2005 budgets (search) yet -- California, Illinois, Kentucky, Michigan, New York and North Carolina -- account for about a third of the national state budget picture.

Aided last year by a $20 billion one-time infusion from the federal government through the Jobs and Growth Tax Relief Reconciliation Act (search), states' general fund spending grew a collective 2.4 percent, the report says, and education was a prime benefactor.

Spending for K-12 education grew almost 5 percent, up 2 percent from two years ago. Higher education saw a 3.2 percent increase in spending; it fell 0.5 percent in fiscal year 2003, the report says.

Though the report cautioned that revenues were artificially inflated by the federal government's $20 billion, "some of the growth is attributable to improved revenue performance," it said.

"Most states are seeing a brightening picture as far as revenues are concerned, and I think that's good news for taxpayers," said Utah House Speaker Marty Stephens, a Republican and president of the NCSL.

Host-state Utah ended the fiscal year with a $106 million surplus, the largest since 2000, when the state finished $120 million in the black.

"The budget picture is definitely improving," agreed Michael Calvert, legislative fiscal analyst for Nebraska, where year-end revenues exceeded estimates by more than $100 million.

States may be seeing higher revenues, but they are not likely this year -- or any other year -- to again see state coffers swell like they did just a few years ago, when the stock market was booming and high-tech and dot-com companies didn't realize they were on bubbles.

"It was a fine time to be a lawmaker and a fine time for state budgets," said Eckl.

But in the subsequent downturn and the aftermath of the terrorist attacks, states tightened up.

Like other states, Nebraska made severe cuts to education spending, Medicaid (search) and had many across-the-board cuts in numerous state agencies to meet the budget. Such cuts put states in a conservative mindset, and many aren't expected to make big restorations just because they've got money to spend, Calvert said.

Utah did not use its share to fund recurring expenses, like salaries, since the money wouldn't be there in the next fiscal year and lawmakers would find themselves scrambling to find funds.

"You hope governments will learn lessons from this," Stephens said. "They need to be very prudent in how they spend the people's money.