WASHINGTON - Financially beleaguered states will walk another budget tightrope next year, a report by the National Conference of State Legislatures concludes.
"States have enacted austere budgets that could easily come unglued if the economy falters further, or if federal mandates or other external forces drive health and welfare spending beyond budgeted levels," says the report.
The report, titled "States Budget and Tax Actions 1992: Preliminary Report," is based on a survey of legislative budget officers.
States revenues are expected to rise by an average of 7.1% next year, compared with a 4.2% increase this year, the report says. Spending is projected to grow 4.8% next year, versus a 4.9% increase this year.
However, the prospects for state budgets next year are much bleaker than these numbers indicate, the report says. "The outlook for immediate improvement is not promising." it says.
States watched their cash reserves, a "significant indicator of state fiscal conditions," dry up this year, the report says. Fiscal officers hold little hope of building those balances back up next year.
A "prudent level of reserves" for the average state is 5% of its general fund expenditures to protect against unforeseen revenue down-turns or surges in spending, the report says.
However, reserves are expected to decline to 1.4% at the end of this year, compared with 2.6% at the end of fiscal 1991. They are expected only to inch up to 1.7% by the end of fiscal 1993, the report says. "By any measure, reserves are inadequate. Their inadequacy shows state fiscal weakness more clearly than any other single number can," the report notes.
In general, reserves are unlikely to improve much because states are expected to be caught in the familiar trap between burgeoning spending pressures and inadequate revenue gains, the report says. "State finances are at a very low point," said Paul Burke, president of the legislators' group.
States only increased their general fund appropriations by 4.8% for next year, but the report says this is "probably deceptive" because it does not accurately portray states' true spending pressures.
Certain federally mandated programs, such as Medicaid and Aid to Families with Dependent children, are eating up ever-greater shares of state budgets. But the effects are understated because more of the money comes from earmarked funds rather than a state's general fund, and from funding that would have been used for other programs, the report says.
States plan to spend 9.4% more on Medicaid in 1993 than this year, and 6.5% more on the children's aid program, the report says. "This puts pressure on the remaining areas of general fund expenditures, which include economic development, aid to local governments," and other non-mandated programs, it says. And this means they will be cut, it adds.
This year, states have spent 12% more on Medicaid than they did in 1991, and 9.2% more on Aid to Families with Dependent Children, the report says.
On the revenue side, states say the expected 7.1% more in 1993 than this year should come almost completely from tax and fee increases and inflation. "Forecasters expect real economic growth to be negligible," and as a result state officials "do not expect conspicuous improvement in state finances."
State tax increases enacted this year are expected to bring in 1.4% or $4.3 billion more in revenues in 1993, the report says. It notes that this rise is "much smaller" than 1991 tax increases that brought in 5.4% or $16.2 billion for states this year.
"Most states avoided substantial tax increases [this year], partly because of last year's large and widespread increases," the report says.
Unlike the last two years, states this year relied less on income and sales tax hikes and more on increases of other taxes, the report says. For example, increases in health care-related taxes will be the biggest source of new tax revenue for states in 1993, accounting for 42% or $1.8 billion of the total increase in revenues, it says.