Beleaguered state budgets: state budget problems are dominating national headlines and topping legislative agendas.

• Author: Eckl, Corina

State finances are closely tied to the health of the national economy, so when the national economy stumbled so did state budgets. As early as FY 2001, lawmakers began seeing budget gaps. And that was just the beginning.

In fact, many states have grappled with budget problems for three consecutive years. With forecasts for FY 2004 looking grim, most states are facing at least another year of difficult budget decisions. For some, the pain is expected to last even longer.

Before states can look too far into the future, however, they have to contend with current problems. In crafting their FY 2003 budgets, states confronted an aggregate gap--lower than expected revenues combined with spending overruns--that exceeded $49 billion. Most lawmakers thought they had done enough to close this gap, and keep it closed, when they enacted their budgets. They tapped reserves, cut spending, delayed projects and even raised taxes, but those actions were not enough. By late November 2002--only a few months after the fiscal year began--states faced a new collective gap of $17 billion. By late January, that gap had grown to nearly $26 billion, a jump of almost 50 percent.

Forty-nine states operate under balanced budget requirements--Vermont is the exception. These requirements mean that states must balance their books by the end of the fiscal year, which is June 30 for 46 states. This poses a distinct challenge, because gaps seem to be growing as the fiscal year nears its end.

Current state fiscal problems are widespread and, in many cases, severe. By late January, 36 states reported budget gaps. Some states reported no gaps because they already had taken action to close them. But for those that still face problems, 15 have holes in excess of 5 percent of the state's budget. In four of these, the gaps exceeded 10 percent.

While this fiscal year is proving to be exceedingly challenging, it appears that the worst is yet to come. At least 36 states are facing gaps for FY 2004, with 33 looking at holes above 5 percent. A staggering 18 states must close gaps larger than 10 percent. Cumulatively, next year's state budget gap is nearly $70 billion and growing.

A handful of states, typically ones that have natural resource-based economies, like New Mexico and Wyoming, have fared better than most during this economic decline. But states reporting solid finances are the exception in this fiscal climate.

HOW DID STATES GET HERE?

There is considerable debate about how states got into their current bind. For the most part, the sluggish national economy, declines in the stock market, contractions in the manufacturing and high-tech sectors, and soaring health care costs combined to undermine the stability of state budgets. Notwithstanding these factors, some argue that the states brought their current fiscal problems on themselves by going on a spending spree in the late 1990s and at the same time cutting taxes too deeply. These contentions merit further examination.

The economic boom of the late 1990s was extraordinary. Revenue collections routinely outpaced forecasts, and, as a result, states began piling up surplus money. State lawmakers took a variety of actions with these unexpected funds.

To begin with, lawmakers stashed record amounts of money into their rainy day funds. By the end of FY 2000, states had accumulated more than $20 billion in these accounts. Combined with...