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FISCAL SURVEY OF THE STATES: With Budget Surpluses, States Restore Funding to Previously Cut Programs, Keep a Careful Watch on Changes in the Economy and Medicaid Costs

“It is a good time to be governor,” said NGA executive director Raymond C. Scheppach

State fiscal conditions continued to improve in FY 2006, according to The Fiscal Survey of States, a twice-annual report from the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO). The report found that increased state revenues and strong budget reserves allowed states to offer tax cuts, increase funding for education and other programs that were cut in the past, and replenish rainy-day funds. However, several factors, such as the cyclical nature of the economy and projected increases in Medicaid costs, have states cautious about the future.

“It is a good time to be governor,” said NGA executive director Raymond C. Scheppach. “The stable, healthy fiscal condition of states across the nation affords current governors options their predecessors did not experience. Governors are better-positioned to prepare their states for long-term spending pressures from structural deficits in Medicaid and rising health care costs.”

Indeed, states have come a long way since FY 2002 and FY 2003 when thirty-seven states were forced to make midyear budget cuts that totaled nearly $15 billion and $11.8 billion, respectively. Even as recently as 2004, eighteen states made budget cuts that amounted to $4.8 billion. In FY 2006, however, only two states were forced to make budget cuts, and revenues were up across the board. In fact, revenues exceeded expectations in forty-six states and were on target in the other four states.

Because of this increase in revenue, state spending was also up. According to the report, state general fund expenditures were $602 billion in FY 2006, an increase of 8.7 percent compared to the previous year, and 2.3 percent higher than the twenty-eight-year historical average rate of growth. In overall spending, Medicare accounted for 22.2 percent of all state spending, followed by elementary and secondary education (21.5 percent), higher education (10.7 percent), transportation (8.7 percent), corrections (3.4 percent), public assistance (1.9 percent), and all other expenditures (31.6 percent).

Even with the increased spending, states were still able to build up significant balances at year’s end. Total balances were $59 billion in FY 2006, an increase of $11 billion over 2005, and the highest level since 2000. With these high balances, states have faced increased pressure to restore cuts to health care, education, and other programs that were necessary in leaner years.

“States have now effectively rebuilt their rainy day funds and spending is somewhat above average so that states have provided some limited tax cuts as well as bolstered programs that had previously been cut during the lean years,” said NASBO Executive Director Scott D. Pattison. “The question state finance officials are asking is whether the state fiscal situation is peaking for this cycle.”

Even though fiscal 2007 revenue is expected to be 3 percent higher than that of 2006, states have adopted a cautious approach when it comes to additional spending, in large part due to projected increases in Medicaid spending. According to the report, Medicaid spending increased by 5 percent in fiscal 2006 and, with long-range estimates for national health spending at 7.2 percent, Medicaid will continue to strain state budgets.

The complete report is available at


Governors Set to Deliver State of the State Addresses


During the early weeks of 2007, the nation’s governors will outline in their State of the State addresses how they intend to spend budget surpluses. During January and February, Straight A’s will cover these speeches to see which governors intend to make investments in education. Specifically, coverage will focus on policies and initiatives around high school reform.



New Resource Guide Available from the National High School Alliance


The National High School Alliance website features a new resource guide that allows policymakers and practitioners to access strategies, research, and other tools on how to transform high schools to meet the needs of their students.

The guide, dubbed the Resource Guide for Action: Transforming High School for All Youth, is based on the six core principles of the High School Alliance’s A Call to Action: Transforming High School for All Youth, a framework of principles and recommended strategies to guide leaders at all levels in transforming the traditional, comprehensive high school so that all students are ready for college and work.

The National High School Alliance is a partnership of over 50 leading organizations that share a vision for a nationwide commitment to fostering high academic achievement, closing the achievement gap, and promoting civic and personal growth among all young people in our high schools and communities. The Resource Guide for Action is provided with support from Carnegie Corporation of New York, The College Board, and the Bill & Melinda Gates Foundation.

More information on the Resource Guide for Action and the National High School Alliance is available at


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