State revenues 4 percent higher than expected.

• Position: The Fiscal Survey of the States results

In a report released in December, the National Governors Association and the National Association of State Budget Officers found that revenues improved notably in fiscal 2005, enabling many states to begin to restore funding to programs cut during the previous economic downturn and return year-end balances to relatively normal levels. However, the budgetary strain imposed by Medicaid, and looming issues such as pensions, growing school-age population, and infrastructure needs cause states some concern about the long-term outlook.

"The data we are releasing today demonstrates a positive trend in the fiscal condition of our states," said NGA Executive Director Raymond C. Scheppach. "Following a long period of fiscal downturn, states are climbing their way back to economic health."

Data from The Fiscal Survey of the States reveals that state revenue growth is strong. In every state, fiscal 2005 collections of sales, personal income, and corporate income taxes either met or surpassed budgeted estimates. In addition, fiscal 2005 revenue collections were 4 percent higher than anticipated in originally enacted budgets. Sales taxes were 1.2 percent higher, personal income taxes were 5.7 percent higher, and corporate income taxes were 11.6 percent above original estimates.

In another encouraging sign, states are restoring normal levels of total balances. Composed of ending balances and the amounts in budget stabilization funds, total balances were a critical tool for combating the recent fiscal downturn and are a bellwether of the fiscal health of states. Strong state revenues have allowed states to begin to rebuild budget reserves to levels at or above those considered adequate by budget observers (roughly 5 percent of expenditures). In fiscal 2005, total balances are $38.5 billion, or 6.8 percent of expenditures--up from $26.7 billion, or 5 percent of expenditures, in fiscal 2004. Balances are expected to decline, however, to 4.6 percent in 2006.

While finances improved substantially in fiscal 2005, states continue to face myriad spending challenges. State general fund spending grew by 6.5 percent in fiscal 2005, slightly above the 28-year average of 6.4 percent. Contributing to the higher-than-average growth rate are increased spending on programs cut during the downturn, an increase in state...