State budgets in best shape in last five years.

State budgets are healthier than they've been in five years thanks to improving revenues and careful balancing of priorities by state legislators across the country, according to State Budget & Tax Actions 2005: Preliminary Report, released in late August by the National Conference of State Legislatures during its 2005 Annual Meeting.

The 46 states that responded to NCSL's budget survey ended fiscal year 2005 with an aggregate balance of $35.7 billion--an 8 percent increase from fiscal 2004. Wall Street analysts recommend a balance of at least 5 percent. States ended fiscal 2005 with 7 percent. That's almost twice what they projected. No state ended fiscal 2005 with a deficit.

Legislative fiscal directors are projecting to end fiscal 2006 in the black as well--with an aggregate balance of 4.7 percent. At the same time, however, they expect spending to rise by 5.7 percent, mainly because of Medicaid, education, and other needs.

"While we've turned the corner on this budget crisis, it's only a recent development at this point, so we're still feeling the effects and will for a while," said NCSL President John Hurson of Maryland. "But I think that state legislators and American citizens should be commended for making and enduring the painful cuts of the past that have brought us to this point of recovery.

Between fiscal 2001 and fiscal 2004, the states closed an aggregate budget gap of more than $235 billion. Temporary federal aid of $20 billion, half of which went toward Medicaid, helped. To bridge the rest, legislators had to cut programs, raise revenues, and tap reserves.

Rising revenues are a major factor in states' improved fiscal health. Fiscal 2005 revenues were 6.8 percent above fiscal 2004 levels. In 29 states, they were up more than 5 percent, with eight of these above 10 percent. In a departure from recent years, no state reported a decline in revenue. Most of the revenue growth can be attributed to a general improvement in the nation's economy. Some states did take tax actions in 2004 that raised additional funds.

Because of large increases in Medicaid spending and the replacement of temporary federal aid in the previous two years, ...