The favorable revenue forecasts greeting state lawmakers as they begin convening this week for the 2006 legislative season are tempered by the spiraling costs for Medicaid, high energy prices, and increased demands from K-12 and higher education.
Continuing a trend that began three years ago, fiscal officers in 42 states told the National Conference of State Legislatures in a recent survey that they expect revenue collections for the current fiscal year to be above projections. Two dozen states are already raising their revenue forecasts.
Education is expected to be a top fiscal issue in 15 states, according to the survey. For example, Wyoming wants to speed up funding for a new scholarship program; Georgia must absorb an estimated 10,000 new students from the hurricane-ravaged Gulf Coast; and Kansas, New York, and Texas will address court orders on school finance.
In addition, Arizona, Hawaii, and Washington predict they will need to come up with more money to fully finance their needs in elementary and secondary education for fiscal 2006.
Fiscal officers in 23 states told the Denver-based NCSL that health care would be a top fiscal issue.
A recent survey found that state fiscal officers are largely optimistic about revenues in fiscal 2006. But 19 states expect costs to exceed budgeted amounts in one or more key programs.
Spending Overruns (in FY 2006 budgets)
Projected costs above budgets:
• Medicaid: 12 states
• Corrections: 7 states
• Energy costs/assistance: 6 states
• K-12 education: 3 states
SOURCE: National Conference of State Legislatures
But while the continuing upturn in state funds, which began in fiscal 2003 after two years of recession-driven declines, offers the potential of more money for schools, educators will still face stiff competition.
“My view is that even during the downturn, governors have tried to protect elementary and secondary education,” Scott Pattison, the executive director of the National Association of State Budget Officers, said during the recent release of another state finance report, produced by NASBO and the National Governors Association. But, he said, “if this trend [toward higher health-care costs] continues, you are going to see more restraint in spending for education.”
According to that report, released Dec. 20 by the two Washington-based groups, elementary and secondary education consumed 21.9 percent of total state budgets in fiscal 2005, up slightly from 21.3 percent in fiscal 2002, but still behind Medicaid, which accounted for 22.5 percent in fiscal 2005, up from 20.7 percent in fiscal 2002.
The NGA-NASBO report also noted that the enacted fiscal 2006 state general-fund budgets reflect a 6.3 percent increase over fiscal 2005 levels—just below the average of 6.4 percent since fiscal 1979.
“We really have had significant improvements since that awful period of fiscal 2002, though it is expected to moderate in fiscal 2006,” said Raymond C. Scheppach, the executive director of the NGA.
Escalating Costs
Three states predicted that they will need to spend more in fiscal 2006 for K-12 education than they budgeted, according to the NCSL report. On the bright side, those states are also projecting higher-than-anticipated revenues.
Washington state is projecting an overrun of about $88 million out of a base of $11 billion in its two-year precollegiate education budget covering fiscal years 2006 and 2007. The largest chunk of that amount, or $42 million, is tied to rising enrollments as more families, including military families, move into the state.
Another $31 million of the overrun is projected as a result of a 2000 voter-approved initiative mandating that salaries for public school teachers be linked to inflation. As a result, a recent 1-percentage-point rise in the state’s inflation rate means that teacher salaries must also jump by 1 percentage point. In addition, $15 million will be added to K-12 spending to adjust for inflation.
At the same time, the NCSL reports that Washington state is predicting revenue collections that are 4.8 percent, or $588 million, above projections.
Arizona is projecting its per-pupil foundation formula for K-12 education will come up about $46 million short. The state’s K-12 budget for fiscal 2006 is about $4.3 billion. The new money will be needed because of increasing enrollment. “There’s just been a demographic shift,” said an Arizona legislative staff member who tracks school finance.
At the same time, Arizona forecasts revenue collections of $206 million, or 10.7 percent above anticipated fiscal 2006 levels.
Hawaii is the third state expecting an overrun. According to the NCSL report, “[State] officials anticipate additional funding requests for electricity from all state agencies in the current fiscal year and possible requests in adult mental health and special education.” The Aloha State is predicting that revenue will be 5.1 percent, or $226.2 million, above fiscal 2006 projections.
Health, Energy Worries
A dozen states, the NCSL says, are projecting cost overruns in Medicaid, a federally sponsored but state-administered health-care program for low-income residents that is jointly financed with state and federal money.
Of those 12 states, just four detailed the amounts of the overruns for the survey: Iowa ($39 million to $54 million), Maryland ($110 million), New York ($117 million), and Utah ($11 million).
The pressures from Medicaid and other health-related programs are not likely to let up soon. Not only is demand from clients expected to grow, but states also have added discretionary programs over the years for dental, eye-care, and other needs.
“With more money, states have added optional programs and increased eligibility,” said Corina Eckl, the fiscal-program director for the NCSL. “But with prescription costs growing and an aging population, those programs grow faster than state revenue grows.”
Energy costs are expected to be another area of fiscal pressure for states as they review current budgets and plan for fiscal 2007, which begins July 1 in all but four states.
The NCSL budget survey included a special question on the effects of anticipated high energy costs on state budgets. Though individual results vary, 17 states reported they expect to consider or make supplemental appropriations to address higher fuel and heating costs in general, or for schools in particular.
Ohio and South Carolina noted they would allow school districts the flexibility to use state aid intended for school bus acquisition to pay for added fuel costs. Minnesota Gov. Tim Pawlenty, a Republican, has directed state agencies to reduce fuel consumption wherever possible, and Georgia Gov. Sonny Perdue, also a Republican, asked districts in September to take two “early snow days” to conserve diesel fuel. (“Most Ga. Schools Heed Conservation-Minded Call to Close,” Oct. 5, 2005.)
Asked if she expected states to consider other special fiscal aid to help schools with high energy costs, Ms. Eckl noted evidence that fuel prices are leveling out. “It’s difficult to say right now,” she added, “but it depends on how prices end up and whether they are sustained at high levels.” (“As Winter Settles in, Schools Explore Ways to Cut Energy Bills,” Dec. 14, 2005.)
Wyoming Scholarships
Wyoming lawmakers, meanwhile, still study alternatives for financing the state’s new Hathaway Scholarship Program, which would provide grants of up to $1,600 per semester to qualifying Wyoming high school graduates to attend in-state colleges and universities.
The legislature last year set up a trust fund to pay for the scholarships, though it is expected to take up to five years for the fund to be built up to its planned level of $400 million. Lawmakers will consider options for speeding up the financing for the program so that scholarships can be awarded beginning next fall, a state legislative aide said.
Lawmakers in Wyoming also must review the school finance system, a process that must take place every five years under state law. Though Wyoming’s per-pupil expenditure of about $11,000 is one of the highest in the nation, there is pressure to increase that amount.
Plaintiffs in a long-running school finance case were back in court last month arguing that Wyoming can do more to fix school funding by paying more for teachers, teacher training, and building maintenance. The state’s declining enrollment also means less aid for many districts.
At the same time, Wyoming is projecting $1.8 billion in excess revenues from mineral royalties in fiscal 2006. And while that’s not a bad problem to have, it creates another set of concerns.
“There is pressure to share in the windfall,” the legislative aide said. “A lot of different ideas and a lot of agendas will be explored this session.”
