Roller coaster budgets: the astonishing revenue boom of the late 1990s gave lawmakers an exhilarating ride. The recent bust now has policymakers seeing red.

AuthorEckl, Corina

State lawmakers have been mired in budget misery for nearly a year now. The fiscal boom of the late 1990s that started sputtering in early 2001 came to a screeching halt by the end of the year. National economic woes, exacerbated by the Sept. 11 terrorist attacks, made their way to the state level. As early as FY 2001, budget problems were starting to emerge. But by FY 2002, they threw lawmakers for an unexpected loop.

"No one really knows when you start a recessionary period how deep or how long that cycle will go on. You hope it'll be a minor glitch with mild effects on the state's budget," notes Representative Eldon Mulder, co-chair of Alaska's House Finance Committee. "Often times, as we've seen with this downturn, the effects aren't as minor as we had hoped."

In fact, FY 2002 budget problems were widespread and often severe. In April, 43 states reported budget gaps--lower-than-expected revenues plus spending overruns--with the total reaching $27 billion. By June 30, the end of the fiscal year for 46 states, the figure had jumped to $37 billion. In a dozen states, the gaps exceeded 10 percent of the state's budget.

A handful of states, typically ones with natural resource-based economies like Louisiana, New Mexico and Wyoming, managed to get through the fiscal year without a budget gap. But their reprieve appears to be temporary.

"Anywhere from 40 percent to 70 percent of our revenues comes from the mineral extraction industry--oil, gas, trona, coal--so we're always on a roller coaster in Wyoming," reports Senator Grant Larson, chair of the Appropriations Committee. "When energy prices spiked, our projected $100 million deficit turned into a $700 million surplus. But now we're coming to the down part of the cycle because the price of natural gas has dropped significantly and our oil reserves are diminishing."

With a few exceptions, most states were concerned about faltering revenues, especially from personal income tax collections. Forty-one states levy broad-based personal income taxes which, on average, account for more than a third of state tax revenues.

Since personal income tax collections are such an important source of revenue, officials were holding their collective breath on what the April numbers would show. The final figures were sobering. Total personal income tax collections from January through April were $14.7 billion--about 14 percent--below the prior year. Collections were below target in 39 states, with a dozen below forecast by more than 10 percent.

The bad news wasn't limited to personal income tax collections. Many states reported that sales and corporate income taxes also failed to meet projected levels.

"The revenues generated by the Olympics may have disguised some of the underlying problems that were simmering in our budget," says John Massey, Utah's legislative fiscal analyst. "We had to revise our revenue estimates in May, so a lot of the problems that would have shown up earlier did not show up until then. We ended up with a significant shortfall in our FY 2002 revenues."

For most states, however, shortfalls began appearing early. Many initial actions to address them were used by governors through their authority to keep the budget balanced. But it became increasingly apparent that the gaps were growing and needed the attention of state legislatures. As a result, several convened in special sessions last fall.

All the while, policymakers were keeping a close eye on lackluster revenue performance. Many held emergency meetings to reduce estimates. Before the fiscal year ended, several states had lowered their forecasts numerous times to reflect plummeting revenues.

The result was that nationally, state revenues in FY 2002 were 1.4 percent lower than actual collections in FY 2001. A staggering 29 states reported year-over-year revenue declines, with eight seeing drops bigger than 5 percent.

"Like so many other states, our real revenues in FY 2002 were less than they were the year before," says Senator Penfield Tate, vice chair of Colorado's Joint Budget Committee. "Additionally, projected real revenues for the current fiscal year are going to be even less than they were two years ago."

CLOSING THE GAPS

As legislative sessions began earlier this year, most states were in the difficult position of trying to close FY 2002 budget gaps while crafting or revising--in the case of biennial budget states--their FY 2003 budgets. As states looked ahead, it was painfully clear that they were facing additional shortfalls.

Based on initial estimates, the total gap for FY 2003 was $58 billion--on top of the $37 billion from FY 2002. Although California's astonishing $23.7 billion hole accounted for more than 40 percent of the total, 13 states reported gaps above 10 percent.

Most states pared spending as their first line of attack. "Three things happen in tough times," says Kirk Jonas, deputy director of Virginia's Joint Legislative Audit and Review Commission. "First of...

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