N.C. Budget Remains in Good Shape While Other States Slide

By ANDREW WELSH-HUGGINS
Associated Press Writer

Posted: Dec. 18, 2007

Three independent reviews of state finances have reached the same troubling conclusion: budget shortfalls and spending cuts are coming.

Nearly half the states are predicting budget shortfalls in the next two years, with 13 saying they could face a deficit for the fiscal year that begins July 1 in most places. Among the states predicting problems are California, Florida and New York.

The deficits could reach at least $23 billion, according to an analysis by the Center on Budget and Policy Priorities released Tuesday.

"We're really teetering on the edge," said Iris Lav, the center's deputy director. "With the deficits this large already before there's actual evidence we're in a recession, that seems quite serious."

But North Carolina's fiscal picture remains bright, at least for now. State government revenue collections were $120 million above budgeted projections for the first five months of the fiscal year through Nov. 30, according to Gov. Mike Easley's office.

While tax revenues from the holiday shopping season through April 15 are uncertain, "We expect, if trends continue during the year, to be in good financial shape," said Easley budget adviser Dan Gerlach.

The report mirrors findings earlier this month in two other surveys, one by the National Conference of State Legislatures and the other from the country's governors and state budget officers.

The report by the National Governors' Association found that states already are spending less in the current budget year than in fiscal 2007, with leaders in a few states talking about tapping their rainy day funds to address budget shortfalls.

NCSL found that states' revenue growth is slowing and several states have either lowered their predictions for revenue or cut spending.

The wild card is whether the country enters a recession.

"We're at the early stages of some pretty serious problems and whether or not those get worse depends on what happens with the national economy," said Corina Eckl, NCSL's fiscal program director.

The policy center's review of states found:

Ten states are projecting deficits next year and another three are predicting shortfalls in revenue that could lead to budget deficits.
Eleven states say they are likely to see holes open in their budgets next year, or in the financial year beginning July 1, 2009, including Alabama, Ohio and Texas.
Fourteen of the states facing shortfalls have structural deficits, meaning revenue regularly grows more slowly than the cost of providing services. These include Illinois, Missouri and Virginia.
The report also suggests states' rainy day funds are too small. Total state balances declined to 9.6 percent of overall budgets by June 30 and are projected to decline to 6.7 percent by next year.

The policy center said a rainy day fund of 15 percent of annual spending is preferred.

"This decline is another indication of the extent to which states have used one-time resources to balance their budgets in good fiscal times," the report said. "It also leaves many states ill-prepared to face an economic slowdown."

All three reports say the crisis in the housing market is a major culprit, as weak sales reduce tax revenue from the purchase of big-ticket items like furniture, appliances and construction material.

In Arizona, lawmakers are wrestling with a deficit that could reach $1.7 billion by next year. The housing crisis is to blame, as are health-care and education programs whose spending requirements are out of lawmakers' hands.

"We've got a budget that's on automatic pilot," Senate Appropriations Chairman Bob Burns, a Republican, said Tuesday. "We have a number of formulas that are in place that drive the spending."

Gerlach said North Carolina is in better shape because lawmakers projected conservative revenue growth and housing declines haven't been as sharp.

"The underlying economy is still strong," said Gerlach, pointing out that estimated sales tax revenues and income tax withholdings are still above forecasted levels.