Healthier state finances.

• Author: Eckl, Corina
• Position: Includes related articles

State economies are on the mend after four years of infirmity.

After struggling through the recession of the early 1990s, finances have finally stabilized for most states. It is a welcome reprieve for lawmakers because the road to financial improvement has been long and lackluster. "This has been a very slow economic recovery," says David Wyss, research director at the economic forecasting firm of DRI/McGraw-Hill.

The latest fiscal downturn hit the states in 1990. By mid-1992, state balances--the best quick measure of fiscal conditions--had plummeted to their lowest levels in decades. But after back-to-back years of agonizing budget cuts and tax increases, many states started to notice a turnaround in FY 1993. Boosted by a recovering national economy, state financial reports showed a marked improvement by the end of FY 1994. Among the positive developments:

* State reserves continued to grow--up from 2.3 percent of general fund spending in FY 1993 to 2.9 percent by the end of FY 1994. Unlike past years when a few states held the bulk of the balances and most states had little or no reserves, the current balances are fairly evenly distributed.

* Almost every state ended the fiscal year with a balanced budget. The big exception is California where fiscal problems continue.

* Revenues and spending were on target. Nationally, actual revenues were less than 1 percent above last year's forecast--an unusual record considering how difficult it is to accurately predict revenues. Expenditures also were close to target, exceeding projections by only about 1 percent.

The fiscal stability most states enjoyed in FY 1994 set the tone for the budget and tax decisions made for FY 1995 budgets. Among the biggest news: Tax cuts in a number of states will reduce taxpayer liability nationally by about $1.1 billion in FY 1995--the first notable reduction since the mid-1980s. This figure excludes Michigan, where state taxes were increased significantly to offset reductions in local property taxes.

FY 1995 Budget Plans

State spending for FY 1995 is expected to grow 4.4 percent above last year. This means that state spending will out-pace the Congressional Budget Office's 2.7 percent projected inflation rate--a favorable development for those state programs that have received level or reduced funding during the past few years.

Although more state programs will benefit from spending growth, FY 1995 budgets underscore a persistent trend in funding priorities: Medicaid and corrections will continue to receive the largest percentage funding increases. Among the specific items in FY 1995 budgets:

* General fund spending for K-12 education, the largest expenditure category in most state budgets, generally is keeping pace with overall general fund spending and is expected to expand by 4 percent above FY 1994 levels. But when earmarked funds are considered, K-12 funding grows much faster (7.3 percent).

* Funding for higher education has been erratic in the past few years. Because of the fiscal problems in the early 1990s, higher education was squeezed out by other state programs, especially Medicaid and corrections. As fiscal problems have eased, there has been more effort to boost higher education funding in FY 1995. Although percentage increases for corrections (8.1 percent) continue to outstrip increases for higher education (4.3 percent when general and earmarked funds are combined.) for the first time in four years corrections did not get more new state money than higher education.

* Although the 8.1 percent increase for corrections is lower than last year's projected rate of 9.7 percent, corrections remains one of the fastest growing categories of state spending. States report that operating costs for new prisons are driving big budget increases.

* Although Medicaid spending continues to expand rapidly in many states, general and earmarked funding on average is expected to grow by only 5.1 percent for FY 1995. This rate of increase is somewhat misleading because nongeneral fund spending, such as that financed from provider taxes and fees, is declining. Looking at general fund spending alone, the increase for Medicaid is 8.9 percent, the largest percentage increase of any general fund spending category. Despite some general fund spending increases in the magnitude of 10 percent to 12 percent, several states noted that the rate of...