States Let the Good Times Roll!

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The cries of relief heard from the White House when the last fiscal quarter ended with 7.2% economic growth were echoed in state capitals throughout the country. State leaders are beginning to believe that even if good times aren’t back, the worst of the dark times are gone. They shouldn’t get too cocky, however. The next year will be another lean one for state governments — fiscal discipline will be a must. And as times improve, states will have to use any new money deal with some big long-term problems.

The good growth numbers were echoed by solid revenue increases in several states. Arkansas, Georgia, Oklahoma, Vermont and New Hampshire all saw decent increases in tax money pouring in. Nationwide, revenues actually exceeded spending for the first time in three years, if California and its huge budget deficit are removed from the equation. And almost all the states have clamped down on spending; it increased only 1% in the past two fiscal quarters, something that hasn’t happened since 1952.

None of this means states are awash in cash. For one thing, about half the revenue growth in the past six months comes from a $20 billion federal handout. And while some of the small and midsized states are doing better, the big boys are still in trouble. New York, Michigan, California and a lot of other large states will have a tough year, and there’s not much fat left in their budgets after three years of slashing. Arnold Schwarzenegger seems to be learning the hard way that there’s no section heading in the California budget called “Wasteful Spending.” He’s floating the idea of borrowing $25 billion to close the budget gap.

The next year will require state governments to hold the line on spending, keeping it even with inflation. And tax cuts aren’t an option. The next fiscal quarter will not bring 7% growth, and even if it did, states have two big items in their budgets that they need to save every penny for.

One is Medicaid. Rising health care costs have forced states to pour more dollars into health care for the needy. Complicating things is the fact that many states expanded Medicaid in good times, allowing people living close to but not beneath the poverty line to get covered. With almost 50 million Americans needing health insurance, this was a noble goal. And it needs to be continued as long as the federal government refuses to come up with its own solution. But the states cannot solve this crisis by themselves forever. The feds need to find a solution, and several presidential candidates have broached the idea of expanding Medicaid. Fine, as long as Uncle Sam picks up the majority of the tab.

The other is education, the largest expense in state budgets. Schools will remain a state responsibility, but the federal government could kick in more here too. The No Child Left Behind Act imposed several new requirements on states without providing enough money to pay for them. Both Republicans and Democrats routinely condemn unfunded mandates imposed on the states, until it comes time to fund them.

Of course, the federal budget picture is even worse, so there’s little hope more federal aid will be coming any time soon. A recession, two wars and two tax cuts will do things that to the Treasury. But the states need to keep pressing the feds on these issues. Luckily, 2004 is an election year, which might get their attention.