States see first surplus in years

Updated 10m ago
By Dennis Cauchon, USA TODAY

States and local governments took in more money than they spent in the first three months of this year — their first surplus since 2007 — in a sign that the worst of the budget crisis may be over.

The fortunes of many governments could improve dramatically this year if the national economic recovery continues, a USA TODAY analysis found. A flood of federal stimulus money and a modest upturn in tax receipts have improved the health of states after two years of financial havoc.

Revenue has grown faster than spending for three straight quarters, reports the Bureau of Economic Analysis. Tax collections are up, too, although they remain below the peak of 2008.

"The turnaround is here, thankfully," says North Carolina budget director Charlie Perusse.

Most states, cities and school districts are still struggling to balance budgets whacked in a recession that began in December 2007. But most signs provide rays of hope. Behind the turnaround:

• Federal aid. The stimulus law's financial aid for states is peaking, sending $25 billion a quarter to states throughout 2010, about $15 billion a quarter in 2011 and $8 billion a quarter in 2012.

• Spending restraint. States and local governments increased spending just 0.01% last year to $2 trillion. They trimmed employment by 170,000 in the past year to 19.6 million in April.

• Tax rebound. Tax collections rose at an annual rate of 5.4% in the first quarter of 2010, the BEA reports. Doing best: the sales tax and corporate income tax. Still weak: personal income taxes.

Big challenges remain. "The growth is too anemic to make up for recession-induced losses," says Nick Johnson of the liberal Center on Budget and Policy Priorities. "If that's the light at the end of the tunnel, it's still a very long and dangerous tunnel."

Most states have adopted lean spending plans for the next budget year — starting July 1 in 46 states — because revenue forecasts are based on the weak tax collections of 2009.

Last week, Oregon's state economist Tom Potiowsky lowered his state's revenue forecast for 2011 and 2012 based on the latest data from last year's taxes. "2009 really stunk," he says.

North Carolina projects a 2.6% tax collection increase for next year, far below its historic level. "On a scale of 1 to 10, with 1 being most conservative, our forecast is a 2 or a 2.5," Perusse says.

An economic recovery will not heal all budgets. California, Illinois and New York have long-standing budget troubles legislators haven't solved. Other hard-hit states — such as Arizona, Florida and Georgia — took tough measures early and are better positioned to benefit from a rebound.

The wild card: $282 billion in federal aid shrinks each year and ends in 2016. "This could present a 'cliff ahead' problem," says University of Connecticut economist Dennis Heffley. ... ding_N.htm