State Budget Gaps Shrink

Published July 1, 2004

More than half the states are projecting surpluses by the close of the current fiscal year, a sharp contrast to the situation they faced a year ago, according to a new report by the National Conference of State Legislatures (NCSL).

At this time in 2003, states were still struggling to close a cumulative $21.5 billion budget gap. Now they are working to close a total gap of $720 million, according to NCSL’s State Budget Update: April 2004. Thirty-two states are forecasting surpluses by the end of FY 2004, which ended June 30 for most states. Those projected surpluses are the result of improved collections in major revenue categories and paring of programs.

Nine states expect surpluses below 1 percent of their general fund budgets. In five states–Florida, Nevada, Oklahoma, South Dakota, and Wyoming–the surpluses are larger than 5 percent. But this breathing room comes after three consecutive years of fiscal crisis, when states cut funding in such areas as education, health care, and corrections. Some states tapped rainy day funds, increased fees, or raised taxes on items including cigarettes, health insurance, and phone service to help make ends meet.

“States are turning red ink black,” said NCSL Executive Director Bill Pound. “They should be praised for their diligence and their willingness to make tough and often unpopular decisions that were necessary to get through the fiscal crisis. States are also grateful for help from the federal government this past year.”

Federal aid in 2004 provided $10 billion in Medicaid relief and $10 billion in discretionary funds.

At least two-thirds of states report higher-than-expected revenue performance in at least one major tax category. Personal income taxes were above estimates in 18 states, and on target in 12. Twenty-two states report sales tax collections are higher than forecasted. And corporate income tax collections are exceeding expectations in more than half of states. They’re on target in 11 others.

FY 2005 Outlook
Budgets don’t look healthy in FY 2005 just yet, although they are an improvement over the fiscal situation states faced going into FY 2004. Thirty-three states are resolving budget gaps as they negotiate their FY 2005 budgets. The aggregate gap reached $36.3 billion, half as high as the gap states faced going into FY 2004.

Some states are expecting a positive picture. At least 12 project surpluses, bringing the cumulative surplus to about $1.9 billion. These surpluses continue to be modest, though, with Hawaii, Ohio, Oregon, and Texas reporting surpluses of less than 1 percent of their budgets.

“The national economy seems to be improving,” Pound said. “But all states have not felt the full strength of the recovery.”

Gene Rose is public affairs director for the National Conference of State Legislatures. His email address is [email protected].

For more information …

NCSL’s State Budget Update: April 2004 is free to members of the media; for a copy, contact the public affairs staff at [email protected]. Others may purchase a copy of the report for $30 by contacting NCSL’s publications department at 303/364-7700 or sending an email to [email protected].

Closing the Gap, 2004-2005
Number of states with … Fiscal Year 2004 Fiscal Year 2005
Gaps at the start of budget negotiations 42 33
Gaps above 5 percent 37 16
Gaps above 10 percent 19 8
Highest budget gap
$78.4 billion $36.3 billion

Source: National Conference of State Legislatures