At least 38 states overestimated tax revenues

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By David A. Lieb ASSOCIATED PRESS

JEFFERSON CITY, Mo. | With its IOUs and plans to close state offices three days a month, California gets all the attention as lawmakers fight to write a budget set off balance by a $26.3 billion deficit.

But the dozens of states that made spending cuts, tapped into reserves or relied on federal stimulus funds to patch together budgets that took effect this past week are hardly free from worry. Many of those spending plans are based on tax revenue projections that have been wrong throughout the recession - and may be unreliable again.

More miscalculations could bring a variety of consequences: deeper cuts to services such as health care and education, layoffs and furloughs of state employees, renewed consideration of tax and fee increases.

"All of these states are going to have to readjust on the fly because they've started budgets this year that were built on unrealistic expectations and the revenue just isn't there," said Mark Marchand, a spokesman for the Rockefeller Institute of Government at the State University of New York in Albany.

During the just-concluded fiscal year, revenues fell below the projections used to craft budgets in at least 38 states, were roughly on target in 10 states and ahead in just two, according to a survey released last month by the National Association of State Budget Officers and the National Governors Association.

And states weren't just barely missing their revenue projections; they whiffed by large margins.

Missouri, for example, projected 3.4 revenue growth for its 2009 budget. Instead, revenues fell by 6.9 percent compared with 2008 - a more than 10 percentage point swing that Budget Director Linda Luebbering called "the worst in over a generation."

The state's problems are compounding. The 2010 budget passed by Missouri lawmakers projects that tax revenues will rebound modestly. Instead, Ms. Luebbering said, tax revenues now are likely to fall even further.

Missouri Gov. Jay Nixon, a Democrat, started the new fiscal year by vetoing or freezing $430 million in spending - halting college construction projects, reducing Medicaid rate increases to some health care providers and eliminating 200 more state jobs on top of the 1,245 already axed.

In Kansas, a deficit loomed on the second day of the state's 2010 fiscal year because tax collections for the prior year were $126 million short of expectations. Having already delayed tax refunds and school payments from June into July, Gov. Mark Parkinson, a Democrat, imposed yet another round of cuts Thursday on public schools and higher education institutions.

"My hope and my optimism is that our revenue numbers will stabilize," Mr. Parkinson said. "If the revenue numbers deteriorate further than what we anticipate, everything's on the table."

Preliminary figures for the just-concluded fiscal year indicate that states saw their largest overall decline in tax revenues since 1951, according to the Rockefeller Institute of Government. That means many may have started the new fiscal year with even less money than had been expected under their already gloomy forecasts.

Officials in some states are facing a backlash for actions taken as a result of the missed revenue projections.

In Oregon, where personal income tax collections were preliminarily down 15 percent from projections for 2009, the recently adjourned legislature approved a two-year budget dependent upon $733 million in tax increases to avoid cuts to schools and other state services. Anti-tax activists and business groups are planning a petition drive to put the tax hikes to a vote of the people.

After a state council lowered Hawaii's revenue projections for the next two fiscal years, Gov. Linda Lingle, a Republican, ordered state employees to take three unpaid days off each month. Thousands of state employees rallied against the plan at the Capitol, labor unions sued and a state judge blocked the furloughs from taking effect as scheduled on Monday.

In Ohio, some House Republicans have called for the resignation of the Democratic governor's budget director for issuing revenue forecasts that have missed the mark.

But some economists say circumstances are more to blame than human error for the epidemic of missed revenue projections.

State forecasts often rely heavily on national models, which also have been wrong, said Wilbur Maki, a professor emeritus in the Department of Applied Economics at the University of Minnesota who served as state economist in the early 1980s. The depth of the recession and its effect on financial institutions and housing markets also have made it difficult to compare with other downturns, he said.

"This recession is especially troublesome," Mr. Maki said, "so there is very little immediate past experience that would help to make the forecast."

• AP writer John Hanna in Topeka, Kan., contributed to this report.