Revised October 22, 2002

States Cut spending in FY 2002 and FY 2003
Additional Cuts Likely Unless New Revenues are Raised

By Kevin Carey


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             There has been a dramatic deterioration of state fiscal conditions over the last year.   Rapidly declining tax revenues have led state policymakers to implement significant reductions in public services.  It often is difficult, however, to determine the amount by which state spending has been reduced, since budgeting conventions differ greatly among states.  One way to consider the magnitude of the budget cuts is to compare current growth in state spending with the growth of spending in normal times; the growth in normal times can be taken as an approximation of the amount of spending growth necessary to maintain programs and services.  Using this type of comparison, it is clear that state spending for fiscal years 2002 and 2003 is well below the level necessary to maintain services.

Preliminary data from a survey of 43 states suggest that overall state spending grew by only 1.3 percent in state fiscal year 2002; some 14 states spent less money in FY 2002 than in FY 2001.  Spending for FY 2003 is slated to grow by only 1.4 percent. 

These amounts are far below the long-term trend in state expenditures to support government programs and services. From 1989 to 2000, state spending grew at an annual rate of 5.3 percent.  If spending in FY 2002 had grown at the long-term trend rate rather than at 1.3 percent, an additional $20 billion would have been expended in that fiscal year.  An additional approximately $20 billion is missing for FY 2003. 

            In order to reduce spending by this “missing” $40 billion, states implemented a variety of budget reduction strategies.  Some states have cut services for those most in need of assistance during an economic downturn.  Eligibility has been restricted for health insurance, child care, and income support services that benefit low-income families.  Medicaid benefits have been reduced, job training programs for people trying to move from welfare to work have been cut, and the cost of child care for low- and moderate-income families has been significantly increased.

Other state budget cuts in various programs and services have been made.  Cuts in funding for public universities have resulted in higher college tuition, shifting the cost of balancing state budgets to students and their parents.   Reductions in state aid for public schools and local governments have resulted in school program cutbacks and have to some degree shifted a greater share of the burden of funding schools to local property tax payers.   Other reductions in funding have been implemented for state parks, museums, libraries, public health, and public safety. 

            These and other state budgets cuts have been implemented to close state budget deficits that totaled approximately $40 billion for FY 2002 and $50 billion for FY 2003.  Those deficits are primarily the result of weakening state revenues; state revenues overall have declined in four consecutive quarters.  Revenues dropped by 10.4 percent in the last quarter of FY 2002 compared to the same quarter in the previous year (the largest decline since at least the 1980s) and the decline appears to be continuing in many states.  The short-term outlook for state fiscal conditions is bleak, as a number of states have recently increased their estimates of budget deficits in FY 2003, and some states have begun to forecast significant shortfalls in FY 2004.

            States have managed to maintain a small amount of spending growth in FY 2002 and FY 2003 by relying heavily on one-time budget-balancing measures such as spending down rainy day funds or delaying payments to local schools until future years.   Many states have all but exhausted such measures, leaving them to close future budget shortfalls through some combination of revenue enhancements or further spending cuts that are likely to be harmful to low-income populations and individuals and families suffering from the weak economy.  Those states that choose to increase their revenues have a number of viable options available, including maintaining state estate taxes that otherwise would be phasing out as a result of federal law, closing corporate tax loopholes, raising income taxes for upper-income taxpayers, and expanding the sales tax to include some services.  These options can help stabilize flagging revenue streams and prevent further cuts to needed public services.

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