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Good, but not great: States find fiscal stability

By Lisa Lambert

WASHINGTON (Reuters) - Most U.S. states reached a plateau of fiscal stability in 2012 as their revenues slowly grew, but they still face threats from escalating costs, high unemployment and federal budget cuts.

That has given rise to a single refrain in describing current state budgets: good, but not great.

"It's good news but not great news about where states are," said Kil Huh, research director at Pew Center on the States.

"The overall picture is not bad - we're moving in the right direction - but it's certainly not great," Scott Pattison, executive director of the National Association of State Budget Officers, told Reuters.

In presenting findings from a recent survey of state budgets to a group of state lawmakers on Thursday, Arturo Perez, fiscal affairs program director at the National Conference of State Legislatures, repeated the phrase frequently.

In the survey, to be released soon, Perez found that 27 states are meeting or exceeding projections for personal income tax collections for fiscal 2013, which for most states began in July. Another 28 are on target or doing better than expected for sales and use taxes, which make up about 32 percent of state revenues, he said.

"One word stands out, and that is stable," Perez said on Friday about how officers describe their budgets. "At the same time, one other term is slow-growth...You don't see the word robust out there."

Many state budgets are still bruised by the recession, three years after the downturn ended. During the worst of the recession, revenue in most states collapsed just as demand for services from the newly homeless and jobless spiked. States cut spending, raised taxes, raided reserves and turned to the federal government for help.

In more than half the states, 27, the rate of revenue recovery after the recession is slower than after the last two downturns, Perez said. And while 19 states say their revenues have already returned to the peaks they reached before the recession, six say they will only achieve those highs this fiscal year and six in fiscal 2014. Arizona projects its revenues will finally recover in fiscal 2018.

A POSSIBLY GLOOMIER PICTURE

As 2012 draws to a close, states in total are "getting close to 12 straight quarters of growth" in revenues, said Lucy Dadayan, senior policy analyst for New York's Rockefeller Institute, adding the amounts were not adjusted for inflation.

Adjusting revenue amounts for inflation paints a far gloomier picture.

Unadjusted, total state tax revenues in fiscal 2012 were around 1 percent higher than in fiscal 2008, the year before the recession hit most states' budgets. Adjusted for inflation, revenues were about 5 percent lower, she said. For most states, fiscal 2012 ended in June.

About half of the states collected more revenues in fiscal 2012 than in their prerecession peak years, she said. That number plummets to less than 10 states when the amounts are adjusted for inflation.

"The greatest risk for the slow state tax revenue growth is that some states might never fully recover from the recession before the next downturn," she said.

NOT ENOUGH MONEY TO GO AROUND

Because all states except Vermont must end their fiscal years with balanced budgets, many are keeping spending growth flat, unable to undo the dramatic cuts they made at the depth of the recession. Others are still making emergency reductions.

This week, Massachusetts Gov. Deval Patrick suggested cuts in funds for local governments, special education and the court systems to help close the state's $540 million budget gap. The Boston Globe reported the state will likely collect $381 million more in taxes this year than last, but that slow economic growth dragged revenues below the forecasts used to draft the budget.

"States are announcing budget cuts because - even though revenue is improving - there's not enough money to go around," said NASBO's Pattison.

Revenue growth, no matter how small, can give some state leaders "the feeling that maybe we've left the worst behind," said Elizabeth McNichol, who closely monitors states' fiscal conditions as a senior fellow at the Center on Budget and Policy Priorities, and could prompt them to prematurely cut taxes.

"States are still going to have trouble coming up with the revenue they need to maintain services," she said, noting that total spending on education remains below its prerecession level. "States aren't going to be able to meet the needs of school kids and health insurance without looking at revenues again, raising revenues."

Connecticut, for example, will end fiscal 2013 on June 30 with a projected deficit of at least $415 million, according to Comptroller Kevin Lembo, mostly due to rising costs for Medicaid, the health insurance program for the poor that is a swelling cost for many states.

"When you look at some of the states where the revenues recovered far more quickly, a lot were natural resource states...or they made tax changes," said Pew's Huh.

Natural resources include oil, coal and natural gas, which is enjoying a boom. States with large extraction industries such as Texas "weathered the recession far better than other states and they're rebounding more quickly," Huh said.

New Mexico's Legislative Finance Committee reported on Monday it expects revenues to rise 4.7 percent in the fiscal year starting in July from the current fiscal year, noting that oil and gas receipts have kept its revenue forecasts "strong."

State budgets often function as mirrors of the wider U.S. economy. With unemployment remaining high - analysts polled by Reuters say the jobless rate likely leveled off at 7.9 percent in November, compared to 4.7 percent at the beginning of the recession in November 2007 - state's hopes for great fiscal conditions will remain low.

"States rely on income taxes and people need to have jobs to have incomes," said CBPP's McNichol. "Until the unemployment rate returns to prerecession levels we're not going to see state revenues return to prerecession levels."

Dadayan found personal income tax revenues in fiscal 2012 were 1.6 percent below fiscal 2008, not adjusted for inflation.

CLIFF CREATES UNCERTAINTY

When many governors and state legislatures return in January to draft budgets for the next fiscal year, they will also have to contend with the threat of uncertainty.

The U.S. government has scheduled automatic spending cuts for next year. States worry they will have to pick up costs of programs they fund cooperatively with the federal government and cut already lean spending - the U.S. government provides one-third of their revenues.

Mostly, though, contentious negotiations between the White House and Congress over avoiding what has been dubbed the "fiscal cliff," has left states in the dark, unable to confidently estimate their revenues and obligations.

Maine must curtail spending by $35.5 million this fiscal year, as revenues lag forecasts, wrote the state's Commissioner Of Administrative and Financial Services H. Sawin Millett, Jr., to Governor Paul LePage on Monday.

"The...slowing of economic growth and the uncertainty over what the response to the 'fiscal cliff' challenge will be have had an effect on Maine's revenues, as evidenced by the weak performance of most general fund revenue lines over the first four months of the fiscal year," he wrote.

A bipartisan collection of governors recently pressed President Barack Obama and congressional leaders for resolution to the fiscal cliff debate.

"There's no extra money sloshing around at the state level," said NASBO's Pattison. "They're not going to have money to make up for the federal spending cuts."

(Reporting By Lisa Lambert; Additional reporting by Hilary Russ; Editing by Chizu Nomiyama)

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