California Coffers Swelling Again After Struggles

November 25, 2005

States' Coffers Swelling Again After Struggles

By JOHN M. BRODER

LOS ANGELES, Nov. 24 - After four years of tight budgets and deepening debt, most states from California to Maine are experiencing a marked turnaround in their fiscal fortunes, with billions of dollars more in tax receipts than had been projected pouring into coffers around the country.

The windfall is a result of both a general upturn in the economy and conservative budgeting by state officials in recent years, and it is leading to the restoration of school funding, investments in long-neglected roads and bridges, debt reduction, and the return of money borrowed from cities and counties.

In Sacramento, officials are setting aside part of a multibillion-dollar revenue windfall to build up California's depleted cash reserves. Delaware has appropriated money for a pilot program for full-day kindergarten, and Florida will spend nearly $400 million on a new universal preschool program for 4-year-olds. Some states, including New York, New Jersey, Hawaii and Oklahoma, are pouring significant new sums into public colleges and universities after several years of sharp cutbacks.

One sign of the improved fiscal health, according to the National Association of State Budget Officers, is that only five states were forced to make midyear budget cuts, totaling $634 million, in the fiscal year that ended, for most states, on June 30. In 2003, by contrast, 37 states cut spending in the middle of the budget year, by a total of $12.6 billion, the association said.

But the good news is not universal and may prove short-lived. The Great Lakes States continue to be hammered by the loss of manufacturing jobs, and full recovery from the hurricanes in the Gulf Coast States will take years.

And experts warn that even though tax revenues are rising in most of the country, demands on state budgets - particularly for education, health care and pensions - are growing even faster.

"The general picture is that revenue is coming in better than expected for quite a few states," said Scott Pattison, executive director of the National Association of State Budget Officers.

"The problem," Mr. Pattison said, "is that the states are like the guy who had been laid off and his income went way down, and now he's got a job again. But in the meantime, he put a lot of expenses on his credit card, his kids' tuition went up and he tapped into his retirement fund. That's exactly what a lot of states did."

During the lean years, states resorted to a lot of one-time fixes to balance their budgets while maintaining services. They cut spending, raised taxes, drew down their rainy-day funds, relied on federal programs, delayed payments to employee pension funds and borrowed heavily. Now they are coping with the hangover from those stopgap solutions.

In California, for example, increased tax collections and the cumulative effect of state spending cuts produced a turnaround in the state's budgetary fortunes, to the tune of nearly $4 billion, according to analysts for the governor's office and the Legislature. Officials now project a surplus of $5.2 billion at the end of the current fiscal year, up from an earlier projection of $1.3 billion. But all of that excess revenue will be consumed during the coming fiscal year, and the state will find quickly itself back in the red unless Gov. Arnold Schwarzenegger and lawmakers agree on longer-term solutions to the chronic imbalance between revenue and spending.

"We still have to control the rate of growth in spending," said H. D. Palmer, spokesman for the California Department of Finance.

Governor Schwarzenegger, a Republican, sponsored a ballot measure this fall that would have forced reductions in state spending when revenue fell short of projections, but it was soundly rejected by voters, who responded to heated warnings from state employee and teachers unions that it would mean steep cuts in education and other services. Mr. Palmer said the governor would work with the Legislature on another approach.

The picture in New York is similar to that in California. New York entered the fiscal year that began in April with a projected deficit of $4.2 billion. Instead, because of a sharp rise in personal income taxes and capital gains receipts, the state now expects to end the year with a surplus of $1 billion, a $5 billion turnaround in one year. But Michael Marr, the communications director for the New York state budget office, said rapidly rising costs for Medicaid, education and other state programs demanded continued fiscal caution.

New York City has also seen a significant brightening of its fiscal picture. Income, sales and real estate transfer taxes are coming in above forecasts, cutting the projected deficit for the next fiscal year to $2.25 billion from $4.5 billion, the City Hall budget office reported this week.

New Jersey's finances, too, have benefited from the upturn in the economy and a relatively strong stock market, with state tax revenue growing at a double-digit rate over last year. New Jersey is one of several states considering tax cuts in the current fiscal year. The newly elected governor, Senator Jon Corzine, a Democrat, promised property tax relief in the recent campaign.

Indiana is also considering property tax cuts, perhaps offset by an increase in cigarette taxes. Lawmakers in Utah are looking at ways to reduce sales or income taxes after the state took in $90 million more in taxes than anticipated in the first four months of the current fiscal year.

Michigan's economy remains in the doldrums because of the deep slump in the auto industry, and its state budget woes have eased only slightly, said Jay Wortley, senior economist at the Michigan Senate Fiscal Agency. Revenues are expected to grow by a modest 3.2 percent in the current year over the year just ended, Mr. Wortley said. But that rate of growth will not begin to make up for five years of cutbacks in virtually all state services, he added.

Mr. Wortley said prison costs were rising, local governments were not getting promised payments from the state and financing for state universities remained tight. The state is selling publicly owned property and is borrowing against anticipated revenue from the nationwide settlement with tobacco companies to make ends meet.

Despite all that, Michigan officials are debating a package of business tax cuts to attract and retain high-technology companies to replace the jobs lost in manufacturing.

State officials know that the tax cuts will create additional stress on the budget, Mr. Wortley said. "But they feel they have to do something to turn the economy around," he said. "The only thing state government can do to help business is to cut taxes."

And then there are Mississippi and Louisiana.

Both states entered the current fiscal year on a high note. In Louisiana, oil and gas royalties were coming in at a record pace and sales tax revenue was growing at a double-digit clip. Mississippi ended the last fiscal year with a healthy surplus, and the current year began strong, with sales, corporate and individual income taxes exceeding estimates in July alone by $22 million.

Then Hurricane Katrina hit in late August, followed by Hurricane Rita.

"In the absence of these storms," said Greg Albrecht, chief economist for Louisiana's legislative fiscal office, "we were rocking and rolling. Just before they hit, we were sitting around saying, Look at all the money we're going to have. We were finally going to come back from the recession of 2001."

"Then the storms came along and just pulled the rug out from underneath us," Mr. Albrecht said.

Louisiana has emptied its rainy-day fund and cut $600 million from its $7.3 billion annual budget, and the state is still looking for ways to fill what has become a gaping hole in its finances.

Mississippi, which was also hit hard by Hurricane Katrina, took out a $500 million line of credit to make up for lost sales and income taxes and to provide disaster assistance to state residents. J. K. Stringer Jr., executive director of the Mississippi Department of Finance and Administration, said that despite the devastation after the storm, revenue rebounded in October because of heavy spending by federal workers, insurance companies and thousands of evacuees from neighboring Louisiana.

But Mr. Stringer said the state faced unknowns that made it impossible to draft a budget for the coming year.

"We got things under control here," he said, "other than three little unknowns: how much state revenue we're going to collect, how much this thing is going to cost us and how much money we're going to get from the feds."

"Other than that," Mr. Stringer said, "we've got a firm handle on things."

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