Revised February 6, 2004

STATE BUDGET DEFICITS PROJECTED FOR FISCAL YEAR 2005
By Nicholas Johnson and Bob Zahradnik

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State-by-State Data

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Recent press reports may give the impression that the state fiscal crisis is nearing an end.   A recent National Conference of State Legislatures report is headlined “Fiscal Storm Shows Signs of Subsiding,” and notes that revenues in the current fiscal year are meeting or exceeding original forecasts in 34 states.  The Rockefeller Institute reports that state revenues — adjusted for inflation and legislative changes — grew slightly in the July-September 2003 quarter, following eight quarters of revenue decline.  The stronger revenue growth suggests that there will be less need for mid-year budget cuts to keep state budgets in balance in the current fiscal year (state fiscal year 2004, which ends on June 30, 2004 in most states) than there have been in the past two years.

These more positive indicators do not mean, however, that the state fiscal crisis is over.  As states begin to debate their fiscal year 2005 budgets, tough budget choices will still be prevalent.

There are a number of reasons that the news is not quite as good as it appears to be, and that large shortfalls will continue to persist for fiscal year 2005. 

Recent Reports Express Significant Concern about State Budgets in 2005

“Comprehensive information is not yet available on the outlook for FY 2005 budgets. Anecdotal information suggests, however, that problems will persist well into the coming fiscal year. One fiscal officer said, ‘We’re okay for FY 2004. Our real problems will hit in FY 2005.’”

— National Conference of State Legislatures, State Budget Update: November 2003.

“The adopted budgets for 2004 included sharper spending cuts and larger tax increases than 2003 budgets, but … states will be back at the negotiating table in just a few months to present their FY 2005 budgets, and will be facing more gaps and difficult decisions. Even that will not be the end of it... Continuing policy response to the crisis could take another two years or more….

“The conclusion we reach, and we would print this in red if we could, is that despite the welcome economic recovery, this is still crunch time for state and local finance and public services. Furthermore, states and their citizens will probably continue to feel the crunch for quite some time to come.” 

—     Richard P. Nathan et al., It’s Crunch Time for State Budgets, Nelson A. Rockefeller Institute of Government, November 2003.

“Although the state fiscal situation has stabilized, states are not out of the woods yet.  Fiscal Year 2005 will be a difficult year for most states, as they grapple with revenues that have not yet grown substantially, and that still remain significantly below the levels of just two years ago.  Although states expect 2004 to be a much better year than 2003 and 2002, they have not regained the ground they lost in 2001, and revenue growth is likely to continue to be nowhere near as strong as the growth states experienced in the late 1990s.\

—     Donald Boyd and Victoria Wachino, Is the State Fiscal Crisis Over? A 2004 State Budget Update, Kaiser Commission on Medicaid and the Uninsured, January 2004.

“While the economy has begun to show some signs of improvement, states continue to grapple with short term cyclical and long-term structural problems.  Plagued by budget shortfalls for the past three years, states still face uncertainty in the current fiscal year and difficult budgetary choices in the years ahead, even amid strong growth recently in gross domestic product and declining job losses.”

—     National Association of State Budget Officiers, Fiscal Survey of the States, December 2004.

Given the magnitude of the deficits, states likely will enact further cuts to basic services such as health care and education and/or impose new tax burdens particularly on low- and middle-income families (who have borne the majority of the tax increases so far).  These are the type of actions that already have been taken throughout the country this year; states have slashed health insurance programs, cut deeply into budgets for elementary and secondary education and child care, and forced double-digit tuition increases at state colleges and universities.

 

The Budget Gaps for Fiscal Year 2005

In some states, such as California, Maryland, and New York, formal estimates of fiscal year 2005 budget deficits have been made.  In other states, this may not occur until governors’ budgets are released over the next few weeks.  Nevertheless, many states have at least working estimates of the gap that must be closed.  The Center has compiled these working estimates from a variety of sources including public and private statements of government officials, information from nonprofit organizations that work on budget issues, and press reports.  While these estimates are subject to change, they provide the best available information on the magnitude of the problems states are facing for the upcoming fiscal year.

In most cases, the estimates reflect both lagging revenues and the impact of inflation, population growth, and other factors that increase costs.  Some 30 states anticipate fiscal year 2005 deficits totaling about $39 billion to $41 billion, or between 7 percent and 8 percent of general fund spending.[3]

In addition, a substantial minority of states budget on a biennial basis, meaning that the budget actions they took in the spring of 2003 had the effect of balancing their budgets (at least prospectively) through the end of fiscal year 2005.  Some of those states may nonetheless need to cut spending or raise revenues to keep their budgets in balance if revenues fall short of projections.  Moreover, it is possible that at least some of those states will again face shortfalls in their next budget cycle — that is, for the FY2005-07 biennium — because one-time sources of revenue will no longer be available, because expenditure costs are expected to rise, and because revenues are not expected to grow at a rate sufficient to cover the gap.  Oregon, Washington and Wisconsin — as well as Florida, which budgets on an annual basis — are among the states where analysts already project substantial budget gaps beginning in 2005-06.

Projections of FY 2005 State Budget Deficits

     
     
         
  State FY 2005 Deficit Projection (In Millions of Dollars) Deficit as a Percent of General Fund  
         
  Alabama $620 11%  
  Alaska 475 21%  
  Arizona 1,100 17%  
  Arkansas 0 0%  
  California 15,000 21%  
  Colorado 200 to 300 4% to 5%  
  Connecticut 200 2%  
  Delaware 0 0%  
  Florida* 0 0%  
  Georgia 700 to 900 5% to 6%  
  Hawaii 0 0%  
  Idaho 0 0%  
  Illinois 2,000 9%  
  Indiana 595 5%  
  Iowa 336 7%  
  Kansas 600 13%  
  Kentucky 200 3%  
  Louisiana 500 8%  
  Maine 173 7%  
  Maryland 738 7%  
  Massachusetts 1,000 to 1,500 4% to 7%  
  Michigan 900 4%  
  Minnesota 185 1%  
  Mississippi 709 20%  
  Missouri 600 to 900 7% to 11%  
  Montana 0 0%  
  Nebraska 211 8%  
  Nevada 0 0%  
  New Hampshire 0 0%  
  New Jersey 5,000 21%  
  New Mexico 0 0%  
  New York 5,100 13%  
  North Carolina 400 to 800 3% to 5%  
  North Dakota 0 0%  
  Ohio 0 0%  
  Oklahoma 300 6%  
  Oregon 0 0%  
  Pennsylvania 0 0%  
  Rhode Island 188 7%  
  South Carolina 300 to 500 6% to 10%  
  South Dakota 17 2%  
  Tennessee 0 0%  
  Texas 0 0%  
  Utah 0 0%  
  Vermont 0 0%  
  Virginia 927 8%  
  Washington 0 0%  
  West Virginia 120 4%  
  Wisconsin 0 0%  
  Wyoming 0 0%  
         
  District of Columbia 0 0%  
         
  Total   $39,393 to $41,093 7.4% to 7.8%  
Notes:
Florida:  Substantial structural shortfall expected in FY 2006
Sources: Center on Budget and Policy Priorities; FY 2004 General Fund data from NASBO, Fiscal Survey of the States, December 2003, Table A-3.

End Notes:

[1] The count of states includes the District of Columbia throughout the report.

[2] In two additional states, Missouri and South Carolina, the upper end of the range of estimates exceeds 10 percent of the budget.

[3] This estimate takes into account that several states, including Oregon, Texas, Washington and Wisconsin, resolved their FY 2005 budget gap in the last budget cycle and therefore are no longer projecting a shortfall for that year, assuming revenues meet projections.