State Budget Update: November 2007

Read the press release or consult a list of previous updates.

Constituents may download the report free through, and the public buy it for $30 from, NCSL's on-line bookstore.

State finances are weakening according to new budget data from the first quarter of the fiscal year. This substantiates the expectations that lawmakers had when they passed their fiscal year (FY) 2008 budgets that revenue growth rates would slow and balances would fall by the end of the fiscal year. Although early warning signs do not portend immediate bad news, concerns for current year budgets are mounting with even greater concern for some states in FY 2009. This assumes no national recession. If the economy takes a turn for the worse, state finances undoubtedly will decline from the situation reported here.

The biggest concern for the sustainability of current state budgets is revenue growth. Although revenue collections are hitting or exceeding expectations for the vast majority of states, a growing number report that collections are failing to keep pace with what forecasters had projected and what lawmakers had used to establish budgets. Moreover, recent trends are generating concerns over the revenue outlook for the remainder of the fiscal year. As a result, some states already have lowered their revenue estimates or are considering current year spending reductions.

With revenue growth slowing, it is fortunate that state spending plans largely have remained stable. Only a dozen states report spending overruns so far, although some note that it is too early in the fiscal year to know if supplemental spending might be requested.

Based on the current mismatch between revenues and spending, a few states already are reporting FY 2008 budget gaps or have averted them through budget reductions. At the same time, other states are reporting that they have a revenue surplus. It is too early in the fiscal year for this information to be particularly useful, but it does offer an insight into the early developments in FY 2008 budgets and may provide an indicator of circumstances to come.

State budget conditions for the rest of this fiscal year along with revenue forecasts for next year will determine how much flexibility lawmakers will have to address a wide range of fiscal issues during their 2008 legislative sessions. A number of areas are pressing, including the perennial ones: Health Care/Medicaid and elementary-secondary (K-12) education. Together, these two areas account for half of general fund budgets. An issue that has jumped in prominence is capital outlay, especially for transportation. Other key issues will include tax relief and reform, pensions and retirement, and corrections, among others.

This report is based on information collected from legislative fiscal directors in November 2007. It covers the revenue and expenditure situation for the first four months of FY 2008 for most states. It includes information on revenue performance, spending overruns, projections of budget gaps or surpluses, and the top fiscal issues anticipated for 2008 legislative sessions. It also includes a special focus on the effects of the housing sector slump on state revenues.

List of Tables

Revenue Outlook for the Remainder of the Fiscal Year, November 2003-November 2007
FY 2008 General Fund Revenue Forecast Revision
FY 2008 General Fund Revenue Collections
Performance of Major Tax Categories
Revenue Outlook for the Remainder of FY 2008
FY 2008 Spending Overruns
FY 2008 General Fund Budget Gaps and Surpluses (as of October 2007)
Summary of Top Three Fiscal Issues Legislatures Might Address in 2008 Sessions
Top Three Fiscal Issues the Legislature Might Address in the 2008 Session
Special Focus on Effects of the Housing Sector Slump on State Revenues

Posted November 2007
E-mail statefiscal-info@ncsl.org for more information.
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