Slow growth ahead for state spending

Flying high two years ago, state budgets are coming back down to earth with a thud.

That's the word from the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO), which today released the latest 'Fiscal Survey of States,' a report on state spending, revenue actions and year-end balances.

The 70-page report shows slowing growth in the states and predicts tighter fiscal conditions for 2008.

Released twice a year, the report gives 'a good snapshot indicator of the fiscal health of the states,' said Scott Pattison, executive director at NASBO.

The previous report, published in June, showed that fiscal situations had peaked, Pattison said. The data from 2006 and 2007 was phenomenal, he said. 'It was so strong in that period that states would have had no problem running the Marine Corps marathon. Now they could do a walk-run of the 10K, but they couldn't run a marathon.'

In fiscal 2007, growth in state general-fund spending was 9.3 percent, about three percentage points above the 30-year average of 6.4 percent. For fiscal 2008, state spending is budgeted to grow by a more modest 4.7 percent, below the historical average rate.

'So falling down to just under 5 percent is good, but below average and certainly demonstrating a slowing,' Pattison said. 'The trend lines are all moving downward.'

NGA's executive director, Raymond Scheppach, said about 15 states have reported shortfalls since the association tabulated the statistics in the report. 'This is what happens when you have a turning point in the overall economy,' he said.

Much of the slowdown is due to the sub-prime lending crisis in the housing industry, Scheppach said. This slowdown trickled into retail sales ' fewer people bought new homes, carpeting and furniture, and other improvements. And fewer people are taking out home equity loans, of which they usually spent about half, he added. States are losing that sales tax revenue.

The good news is that the states had high balances going into the slowdown, Scheppach said. And the precipitous decline in the value of the dollar actually helped some of the farm states because exports increased.

The fiscal situation of the states depends very much on the economy, Pattison said. 'If it's just a slowing, we'll muddle through. If we go through a recession, the states will be in very bad shape by next June.'

About the Author

Trudy Walsh is a senior writer for GCN.

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