* Revenues, spending inch up
* Demand for services remains high
* Governors want to rebuild reserves
By Lisa Lambert
WASHINGTON, Jan 15 The natural gas boom has
brought fortune to Wyoming over the last year and lifted its
revenues beyond expectations, but in his state of the state
address last week, Governor Matt Mead pressed legislators to
cut spending by 6 percent.
Almost all U.S. states, including long-suffering California,
are in a position unthinkable just a few years ago: their
revenues are growing, and some are even running surpluses. But
governors are hesitant to use their states' windfalls for
spending sprees or massive tax cuts.
"We were the fourth-fastest growing state this past year,"
Mead said. "This is an opportunity we should take. In making
cuts now, we will be prepared for what happens next - whatever
that might be."
Like Mead, other governors are also concerned about the
possibility of another economic downturn and that federal budget
fights between the U.S. Congress and President Barack Obama will
shrink crucial funding sources.
"Congress has failed to pass a budget in years. Uncertainty
alone affects us," Mead said. "And if revenue fluctuations from
the last few years teach us anything, it's that revenues
fluctuate and we need to be ready."
Then there are spending demands beyond their control.
Escalating healthcare, education and pension costs could consume
any extra revenue.
As a whole, states expect revenues to creep up 3.9 percent
this fiscal year. Spending will also likely increase, by just
2.2 percent, according to the National Governors Association and
National Association of State Budget Officers.
Most states begin the next fiscal year on July 1 and
legislatures will have to pass budgets in the coming months.
Only three states - Idaho, Maine and New Jersey - told a
recent survey by the National Conference of State Legislatures
that revenues are coming in less than expected this fiscal year.
Revenues in states rich in natural resources, primarily natural
gas, are particularly strong. Others, such as Virginia and
Maryland, with large federal presences, are also on the mend.
Moreover, state tax revenues in total have grown for 11
straight quarters, according to the Rockefeller Institute of
Government. Even Florida, which bore some of the housing
downturn's worst effects, is projecting an $829 million surplus.
"We're not hearing the dire statements that we heard at the
height of the downturn," said Bob Kurtter, a managing director
at Moody's Investors Service. "We're not looking at these
massive budget gaps. But we are hearing from governments that
they have to hold the line on spending."
Revenues are "not growing fast enough to meet all the
demands for spending," he said. "We expect states are still
going to have budget battles."
'AUSTERE' TONE OF SPENDING
The story Colorado Governor John Hickenlooper told during
his state of the state speech last week is playing out across
the country. Two years ago, Colorado experienced the largest
revenue drop in its history and "had no choice but to cut
funding for schools and other essential services.
"Today, with an improving economy, we have the beginnings of
a reserve fund and we should protect it," Hickenlooper said. "We
are restoring funding for education - not enough to make up for
the $1 billion shortfall we experienced in the Great Recession -
but our steps are in the right direction."
The 2007-09 recession caused states' revenue to plummet and
because all except Vermont must balance their budgets, most made
emergency spending cuts, raised taxes, borrowed and raided
reserves. The U.S. government stepped in with a record transfer
of federal funds to states through its stimulus plan, helping
cover the costs of the biggest budget-busters: education and
Medicaid health insurance for the poor.
"It's been a sustained revenue recovery, but the pace of
growth has slowed in recent months and there's still a lot of
uncertainty out there," said Robin Prunty, an analyst at
Standard & Poor's Ratings Services.
States cut so deeply that demand is bursting in areas such
as education, she said. Meanwhile, slow national economic growth
has kept the number of people needing social services high.
"The focus continues to be on Medicaid," Fitch Ratings
Managing Director Laura Porter said of state spending. "It's a
hard program to control the rate of growth."
Connecticut is one state that had to pass emergency measures
in December to help end a shortfall caused mostly by Medicaid.
"The general tone continues to be austere," Porter said. "I
think you're in a situation where states are trying to rebuild
their financial cushions."
In announcing California's projected surplus of $851
million, Governor Jerry Brown last week pledged to keep spending
restrained. The state will also put $1 billion into its rainy
Virginia Governor Bob McDonnell asked legislators in his
address last week to add $50 million to the state's rainy day
fund, hoping to mitigate effects of the "unresolved drama" of
federal deficit negotiations.
The U.S. government has delayed its scheduled automatic
spending cuts until March, the same time it will hit its debt
ceiling. States can receive a third of their revenues from the
federal government, making them vulnerable to reductions.
RAISING THE POSSIBILITY OF TAX RELIEF
Still, not all states are socking away their increased
revenue. A handful are looking at tax breaks.
Creating jobs and boosting consumer spending "can be
accomplished by returning a significant portion of our state's
budget surplus to the taxpayers who made that surplus possible
in the first place," Iowa Governor Terry Branstad said in his
address on Tuesday.
Branstad focused on changing property taxes, seeking to
"provide nearly $400 million in actual property tax relief" by
putting money toward a homestead tax credit and further capping
tax growth. He said the state could directly fund local
governments, which traditionally rely on property tax revenues.
Texas Governor Rick Perry also is urging legislators to use
any windfall from a 12.4 percent revenue increase for tax
relief. But some lawmakers are cautioning against passing breaks
until a court rules in a case on school funding.
Meanwhile, Louisiana Governor Bobby Jindal is seeking to end
the state's income tax and corporate taxes.
Nebraska Governor Dave Heineman in his address on Tuesday
proposed an overhaul in which the state would eliminate personal
and corporate income taxes and cover the lost revenue by ending
sales tax exemptions totaling $2.4 billion over fiscal 2014 and
Kansas slashed taxes last year and many in the state are
awaiting Governor Sam Brownback's address Tuesday evening to
hear if he suggests further cuts. Last week, a three-judge panel
took the unusual step of directly criticizing the tax breaks
when it ruled the state is unconstitutionally underfunding its
New Jersey Governor Chris Christie had proposed an
across-the-board state income tax cut to be implemented if
revenue reached the high level of growth he predicted for fiscal
But the usually outspoken Christie was mum on the idea in
his state of the state speech last week after the state
legislature's budget officer estimated New Jersey could fall
$705 million short in revenue this fiscal year.