Study shows severity of state fiscal stress.

• Position: Fiscal and Economic Indicators

Editor's note: This article was adapted with permission from The Fiscal Survey of States, a report by the National Governor's Association. The report is available in its entirety at www.nga.org.

Nearly every state is in fiscal crisis. Amid a slowly growing national economy, state revenues have shrunk at the same time that spending pressures are mounting--particularly for Medicaid and other healthcare-- creating massive budget shortfalls. As states fight to balance their budgets, the solutions available to them are increasingly dire, and some of the most difficult fiscal decisions have yet to be made.

This edition of The Fiscal Survey of States reflects actual fiscal 2001, preliminary actual fiscal 2002, and appropriated fiscal 2003 figures for 49 states. (1) Data were collected during fall 2002 and show very difficult state fiscal conditions during this time period.

State Spending

States curtailed spending significantly in fiscal 2002 and fiscal 2003. As a result of weakness in state tax collections and the stalled national economy, the enacted increase in states' fiscal 2002 general fund spending is only 1.3 percent and is expected to grow by the same amount in fiscal 2003, after growing 8.3 percent in fiscal 2001. This includes one-time spending from surplus funds, transfers into budget stabilization funds and other reserve funds, and payments to local governments to reduce property taxes. Findings include the following:

* Medicaid spending grew 13.2 percent in fiscal 2002, the fastest rate of growth since 1992.

* Thirty-seven states reduced fiscal 2002 enacted budgets by more than $12.8 billion after they were passed--18 states more than the previous year. Already in fiscal 2003, 23 states plan to reduce their net enacted budgets by more than $8.3 billion.

* To address the severe imbalance between revenues and expenditures, states relied heavily on specific strategies to reduce or eliminate budget gaps. In fiscal 2002, 26 states reduced that budget gap by enacting across-the-board cuts and using rainy day funds, 15 states laid off employees, five states used early retirement, 13 states reorganized programs, and 31 states used a variety of other methods. This trend will continue in fiscal 2003. Many of these budget balancing actions are onetime only and cannot be used again.

* Seven states provided aid to local governments to reduce property taxes totaling nearly $1.5 billion.

* Two-thirds of the states reported expenditure growth of less...