Job Gains Help States Narrow Budget Gaps

WASHINGTON -- The best hiring stretch in five years is helping governors and legislators narrow state budget gaps after two of the toughest years in decades, according to a report to be released Thursday.

The National Governors Association and National Association of State Budget Officers say tax revenue will increase 2.1 percent to $655.6 billion in the next budget year, which for most states begins on July 1. That would follow a projected 5.9 percent increase for the 2011 budget year.

A big reason for the gains is that job growth is providing states with more income tax revenue, which accounts for 40 percent of state revenue. Companies have added 1.7 million jobs in the past year. More than 750,000 of those jobs were added in February, March and April. Many states are also raising tax rates and fees.

Tax revenues had plunged in budget years 2009 and 2010, the first back-to-back decline on records dating back to the 1970s. The recession sent unemployment soaring, cutting into income and sales tax receipts.

The gains won't come close to ending budget crises for many states. The report says 33 states are facing a total budget gap of $75.1 billion in budget year 2012, though that is better than in previous years. The gaps are partly a result of increased demands on state budgets, particularly from Medicaid, which accounts for about 22 percent of state spending. Medicaid enrollment grew 8.1 percent last year.

"The bottom line is we're recovering, but we're not fully recovered," said Scott Pattison, executive director of NASBO.

Still, this year represents "the beginning of a turning point in state fiscal conditions," the report says.

The added money could allow governors and state legislatures to restore some funding for education and other priorities. It could also help the economy later this year, analysts say, if states don't have to cut spending as deeply and may not have to lay off workers.

A separate report last week showed that state tax revenue rose 9.1 percent in the first three months of this year. It was the fifth straight quarterly increase. Almost every state reported higher income and sales tax receipts, the Rockefeller Institute of Government at the State University of New York said.

States have also increased taxes and fees. Governors are proposing another $16 billion in tax and fee increases for 2012, the NGA report said, mostly in Minnesota, Connecticut and California. That's up from about $9 billion in increases this year. But it is much lower than the $31.4 billion in increases put in place in 2010.

The higher revenues have allowed some states to reduce budget cuts. In Ohio, the state Senate has used higher-than-expected revenue to reduce school budget cuts, and to provide more money for home-based nursing care and aid to local governments.

And in California, revenue is forecast to come in $6.6 billion higher than was forecast at the beginning of the year. That has allowed Gov. Jerry Brown to increase his proposed budget by 5 percent.

Still, states will see a significant drop in assistance from the federal government in budget year 2012. That's when money from the stimulus package enacted in 2009 runs out.

States received $51 billion in stimulus funding in the current budget year, down from nearly $61 billion in fiscal 2010, the report said. But that's projected to drop to $2.8 billion next year.

"That's going to be a challenge for states to fill in that gap," said Lucy Dadayan, a senior policy analyst at the Rockefeller Institute.

Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities, said that states are still climbing out of a deep hole. When adjusted for inflation, state revenues won't return to pre-recession levels until 2014, she predicts.

Deep cuts in state and local spending have slowed the economy in recent quarters. But that could fade by the end of the year or early next year, Alec Phillips, an analyst at Goldman Sachs, wrote in a note to clients last week.