Revenues exceeding forecasts, but states still treading water.

• Position: News & Numbers

While most states report that revenues are surpassing estimates, spending pressures for K-12 education and Medicaid continue to plague state budgets. This is the finding of the latest survey of legislative fiscal offices by the National Conference of State Legislatures.

State Budget Update. April 2005 reports that only three states--Michigan, Nebraska, and New Hampshire--have seen gaps open since enacting the current fiscal year budget. This is a marked improvement from the situation in recent years. In fiscal year 2004, 10 states reported facing gaps after the fiscal year began; the number was 31 in fiscal 2003.

As an indication of the continuing budget pressures facing states, 31 report fiscal 2005 spending overruns for some portion of the budget, compared with 23 states in November 2004. Most of the cost overruns are driven by rising costs for Medicaid and other health care programs, but other areas also over budget include corrections, property tax relief, Temporary Assistance for Needy Families, and mental health services.

"States are barely keeping their heads above the rising tide of new costs," said NCSL President John Hurson of Maryland. "Medicaid and other health care expenses, in addition to demands from corrections, state parks, employee health insurance, and K-12 education are making it tough for states to do anything but tread water."

State efforts to address current budget overruns could be more difficult if not for the improving state revenue picture. Most states collected more tax dollars than originally expected in the first eight months of fiscal 2005. Sales and use taxes are above forecast in 21 states, on target in 18, and below estimate in six. Personal income tax collections are exceeding forecasts in 29 states, on target in 10, and below forecast in just two. As the strongest performing tax category this year, corporate income taxes are above projections in 37 states, on target in six, and below estimate in only two states. Some analysts attribute the strength of the revenue growth to low bases and conservative estimates.

Although state finances seemed to stabilize during the year, the reprieve appears temporary.

As lawmakers craft their budgets for next fiscal year, just over half of states report facing another...