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STATES EXPECT TIGHTER FISCAL CONDITIONS IN 2008: Weakening Housing Market and Higher Funding Demands for Health Care and Medicaid Could Strain State Budgets

"Many states have already begun drawing on their rainy-day funds to address budget shortfalls caused by lower-than-anticipated revenues, and the decline of total balances in fiscal 2008 suggests this trend will continue."

While most states enjoyed healthy revenue growth in 2007, overall growth slowed slightly from the robust conditions of 2006 and is expected to decline even more in 2008. So says The Fiscal Survey of States, a twice-a-year publication from the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO). The decline in revenue is especially worrisome considering the increased funding demands for health care and Medicaid and other long-term issues, such as funding pensions and maintenance and repair of infrastructure.

Already the single largest slice of the state budget pie, health care spending is expected to eat up an even larger share over the next decade. Some of the expected growth, including the option of expanding health care access to the uninsured, is under state control. Other aspects, such as rising health care costs and the aging of the American population, is not. For example, individuals aged eighty-five and older are the fastest-growing segment of the U.S. population, according to the U.S. Census Bureau. Additionally, the Census Bureau projects that the U.S. population sixty-five and over is expected to double in size within the next twenty-five years.

Among specific health care-related issues, the rapid increase in Medicaid spending is the first and foremost concern for many state governments. According to the report, Medicaid spending grew by 7.3 percent in FY 2007, compared to only 1.7 percent in FY 2006. Over the next decade Medicaid spending, which already represents 21.5 percent of total state spending, is expected to grow at an annual rate of 8 percent.

As spending on health care and Medicaid grows, it will constrain state budgets further and, without an increase in revenue, could squeeze spending on education, transportation, and other public services. In FY 2007, expenditures on elementary and secondary education made up 21.4 percent of total state spending while higher education (10.4 percent), transportation (8.1 percent), corrections (3.4 percent), public assistance (1.8 percent), and all other expenditures (33.4 percent) completed the budget pie.

“Steadily rising health care costs, softening in the housing sector, and the need to address looming issues such as aging populations are putting mounting spending pressure on states at the same time as federal funding for critical programs is leveling,” said Raymond C. Scheppach, executive director of the NGA. “Governors realize that meeting these increasing expenditure expectations with limited revenues will be problematic in the future.”

However, the report adds that states appear to be in a better financial situation and better prepared to deal with an economic downtown thanks to rainy-day funds and hard lessons learned in 2001, when state balances fell by nearly $30 billion over a two-year period. At the time, states were able to weather the storm by tapping into rainy-day funds, but many were forced to cut spending and enact tax increases to prevent government shutdowns.

As the economy rebounded over the past few years and tax revenue surged, states were able to build up significant reserve balances to guard against the next downturn. In FY 2006, states had a balance of $69 billion, which represented a thirty-year high. But that number has declined, falling to $62.7 billion in FY 2007 and an expected $45.8 billion in FY 2008, the current year, as states being to tap into these rainy-day funds.

“Many states have already begun drawing on their rainy-day funds to address budget shortfalls caused by lower-than-anticipated revenues, and the decline of total balances in fiscal 2008 suggests this trend will continue,” it reads.

The report also finds that states will limit increases in spending compared to the historical average for FY 2008. According to the report, state spending in FY 2008 is expected to grow by only 4.7 percent, well below the 9.3 percent growth in FY 2007 and the thirty-year average of 6.4 percent. Even with lower spending increases, some states are already reporting budget shortfalls for FY 2008 and will likely have to consider a recipe of spending cuts, tax increases, and borrowing from reserve funds to meet budget shortfalls.

It will be interesting to see how a tight budget environment will affect decisions on education spending. Beginning in January 2008, governors will shed some light on that subject as they begin giving their annual State of the State addresses. As in the past, Straight A’s will provide coverage of these speeches, highlighting the ones with new ideas or programs relating to middle and high schools and their students.

The complete report is available at

Housing Crisis and Declining Property Values Could Affect Local Government Budgets, Spending on Schools


Over the past several months, the ill effects from the housing bubble burst have spread across the country like a new strain of the flu. During that time, the media has raced to report the latest numbers of existing home sales, new home sales, foreclosures, and median home prices in an effort to predict when the housing crisis will end. More recently, however, the focus has turned to the effect that the declining property values will have on local governments and their ability to fund schools and other local services.

Unlike state governments, which have more income sources and better borrowing abilities, local governments rely heavily on local property taxes to fund the services their residents demand. And, like the rest of the news on the housing crunch, the outlook is not good. According to a report prepared for the U.S. Conference of Mayors by the forecasting and consulting firm Global Insight, property values are expected to decline by $1.2 trillion in 2008, while home prices are expected to decline by an average of 7 percent.

Already, the results are being felt in cities and towns around the United States. On December 12, an article in the Washington Post said that the Fairfax County, VA, government is facing a budget crisis that probably will last “several years” and “pinch spending by hundreds of millions of dollars on schools, public safety, and human services.” County officials placed the budget shortfall at approximately $220 million and blamed a steep drop in housing sales and a sharp increase in the number of unsold homes.

And Fairfax County is probably one of the lucky ones. Foreclosure rates there, which grew from 198 in 2005 to about 4,000 in 2007, are dramatically lower than in other parts of the country. In addition, the housing market in Fairfax County is expected to rebound faster than in many other locales. Still, there’s currently no light at the end of the tunnel and some analysts expect that 2009 could be the worst year yet.

Given falling property values and the subsequent decline in property taxes that accompany them, local officials will be faced with tough decisions about whether to cut spending, raise taxes, or do both. Those decisions will be especially tough in California, Florida, Nevada, and Arizona, states that benefited the most from the housing boom and have suffered the greatest drop off, but practically every state is expected to be hard hit.

“If property values aren’t rising, the tax rate has to increase to make up the difference and that’s what we’re seeing,” as Dale Knapp, research director of the Wisconsin Taxpayers Alliance, told The Capital Times (WI). According to Knapp’s organization, school tax rates will average $8.43 per $1,000 of assessed value, up from $8.31 last year. He added that while individual property tax bills may not climb any more than in the past, the new higher rates are going to create a public relations nightmare. “In the past, if your tax bill was up, at least the rate was lower,” he says. “But if bills and the rates are both up, people are going to be pretty upset.”


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