State revenue pressures ease, but expenditure concerns remain.

The National Conference of State Legislatures in December released the results of a new 50-state survey of state legislative fiscal officers that shows more money is flowing into state coffers, but it's not expected to be enough to relieve health and education funding pressures in many states during the next fiscal year.

State Budget Update: November 2004 shows that revenues for the first few months of fiscal 2005 are at or above projections in almost every state. Budget overruns are less severe than in recent years. And budget gaps are practically non-existent.

At the same time, officials in 22 states said budget problems will take up much of legislators' attention in the upcoming session as they craft their spending plans for fiscal 2006. Lawmakers must find a way to replace onetime revenues they used to balance fiscal 2005 budgets. Legislators in most states must contend with rising health care costs, a reduction in the Federal Medical Assistance percentage and funding needs in elementary and secondary education programs.

"Revenue improvement is extremely welcome news," said NCSL President John Hurson, a Maryland delegate. "However, higher Medicaid costs and concerns for programs that have been cut or under-funded in the last few years will put tremendous pressure on state budgets."

Revenues for the first few months of fiscal 2005 are performing substantially better than they have in recent years, and 26 states already have revised projections. Personal income and sales tax collections, which account for about two-thirds of state tax collections, are above target in almost every state. Corporate income taxes, a comparatively small revenue source for states, also are coming in above expectations. In Arizona, corporate income taxes are 47 percent higher than expected.

Since fiscal 2001, lawmakers have closed an aggregate budget gap of more than $235 billion, with $36 billion of this amount closed in the enactment of fiscal 2005 budgets. NCSL's new report shows that just three states are now reporting budget gaps. The chart below shows the improvements states have seen in their budget situations during the past three years.

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