Housing crisis, rising health costs cut into states' finances

Spending growth expected to be below average; rainy day funds may be tapped to cover shortfallsBy ANDREW WELSH-HUGGINS, Associated Press
Posted Thursday, December 6, 2007Read Comments-->12/06/2007 -->
Strong economic conditions for state governments are giving way to troubling budget shortfalls as rising health care costs and harmful ripples from the housing crisis pressure both revenue and spending, a new report says.
States are spending less in the current budget year than in fiscal 2007, which for most states ended in June, according to the analysis by the National Governors Association and the National Association of State Budget Officers released Wednesday.
Spending is expected to grow by only 4.7 percent this year, below the historical average.
A few states are also talking about tapping their rainy day funds to address budget shortfalls caused by lower-than-anticipated revenues in fiscal 2007, which can be traced to the housing slump in many locations.
States' total reserves -- a combination of year-end balances and rainy day funds -- remain healthy but are starting to decline, the report says.
Scott Pattison, NASBO's executive director, used a sports analogy to describe the downturn states were facing.
In the past couple of years, states were so well-off they "would have no problem running the Marine Corps Marathon," he said Wednesday.
"Now we're starting to see some sluggish growth," Pattison said. "They can do a walk-run or a 10K but not necessarily at the peak where they could run a marathon."
Several states have announced budget shortfalls since the report was completed this fall, said Ray Scheppach, the NGA's executive director.
If conditions worsen, states need to be prepared for an economic downturn that could hit them hard, Pattison added.
"There's just so many pressures and there's just not the cushion that they've had in the last few years," he said.
The survey of states' financial conditions in fiscal 2007 found:
•Only one state, Wisconsin, was forced to make a midyear budget cut in the fiscal year that ended, in all but four states, in June.
•State general fund spending grew by 9.3 percent in fiscal 2007, which is significantly higher than the 30-year average of 6.4 percent, as states used surpluses to cover tax cuts and bolster previously underfunded programs.
•States budgeted more modest revenue growth in fiscal 2008, with seven states enacting negative growth budgets.
States also were expected to end fiscal 2008 with total balances of $47 billion, down from $63 billion in 2007 and $69 billion in 2006. Despite the decrease, balances of $47 billion, or 6.7 percent of states' total spending, are still healthy, Pattison said.
Spending on health care is rising again after a relative lull, and the housing market is hurting revenues as states lose the taxes from big-ticket sales driven by real estate, Scheppach said.
"People aren't moving into larger houses, they're not buying rugs and carpets and that type of thing, plus they can't pull the home equity out any more because there isn't any," he said.