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FOR IMMEDIATE RELEASE
November 18, 1998

NEA Study Predicts Looming Fiscal Crisis in Some States Could Halt Progress in Improving Public Education

WASHINGTON, D.C. -- Despite the current strong economy, several states are facing looming revenue shortfalls that threaten to derail efforts to improve the nation's public schools, according to a new study by the National Education Association (NEA).

"We should not be lulled into complacency by the current prosperity," warned NEA President Bob Chase, "because it conceals underlying fiscal problems in some states that will become more acute over the next eight years." Those hidden problems -- or "structural deficits" -- reflect the difference between projected spending needed to maintain the current level of services and anticipated tax revenues.

"As a result of these structural deficits, many of the nation's priorities for improving public education, including smaller class sizes, modern schools, and ensuring the quality of teachers may be in jeopardy," Chase said.

The report, The Outlook for State and Local Finances: The Dangers of Structural Deficits to the Future of American Education, predicts that 11 states will need additional revenue of one percent a year over the next eight years just to maintain existing services. The 11 states are: Nevada, Alaska, Hawaii, Idaho, New Mexico, Wyoming, Arizona, Tennessee, Florida, New Hampshire, and Texas.

Another 12 states show structural deficits higher than the national average of --3.8 percent, meaning state and local governments as a whole will have 3.8 percent less revenue than needed by 2006 in order to maintain existing services (see attached chart).

The study was prepared by Dr. Hal Hovey, former budget director for the states of Illinois and Ohio and now president of State Policy Research, Inc., in Hilton Head, S.C.

The report's detailed projections of state spending and revenues confirm prior research pointing out the need to redesign state and local tax systems. The report explains that state and local revenue growth will lag behind the growth in personal income. Because the costs of maintaining current programs are projected to grow at about the same pace as people's incomes, the slower growth in tax revenues will cause budget gaps.

"States have only one income source -- the personal income tax -- that grows at a faster rate than personal income," said Hovey. Not surprisingly, most of the states facing the worst structural deficits have no state income tax.

"Some states -- particularly those experiencing the strongest economic growth -- will face large shortfalls, while others will not, and some states will actually generate small surpluses," said Hovey. "The future fiscal outlook for state and local governments nationwide is not good," Hovey concluded, "but it represents a problem that ought to be manageable."

Hovey noted that the report's projections are based on the assumption that the federal government will continue to fund the same percentage of state and local costs that it does today. Any federal cutbacks would make it even more difficult for states to maintain existing programs and services.

At the same time, he also warned against unsustainable state tax cuts, despite current budget surpluses in many states. "Most states are not in a good position to make permanent tax cuts unless their decisionmakers are also willing to make corresponding adjustments in their patterns of services," he said. If taxes are cut, large state budget shortfalls will ensue as soon as slower-than-normal economic growth takes place. And, if states use their current prosperity to lower taxes, fiscal pressures will then accumulate at the local level.

New York, for example -- which shows a small structural surplus in the report -- may actually have a budget gap of over $5 billion in FY2000 as a result of a series of recently enacted tax cuts, according to the New York-based Fiscal Policy Institute.

"The primary cause of structural deficits is on the revenue side of budgets," Hovey says. "State and local tax systems were designed for the economy of the early 1900s and need to be modernized to reflect changes since then. It's safe to predict that practically everyone elected to state office this year is going to have to vote for some form of tax increase in the next couple of years in order to balance the budget."

The report concludes that to avoid periodic and painful tax rate increases in the future, many state and local revenue systems need to be overhauled now with the tax burden being spread more equitably across current economic activity. "Changes in taxation should be in the direction of broadening tax bases, rather than increasing rates," Hovey said.

NEA President Chase said the report's showing of structural deficits in some states confirms the conclusion that tax reforms will be necessary to avoid rising property tax burdens -- the least equitable choice -- to finance public schools.

State and Local Surplus or Shortfall as a Percentage of Baseline Revenues in Year Eight of Fiscal Projections

Rank	State	%
1	Iowa	2.7
2	Nebraska	1.5
3	North Dakota	0.9
4	Ohio	0.9
5	Kentucky	0.5
6	Michigan	0.4
7	Connecticut	0.4
8	New York	0.3
9	Maine	0.1
10	Minnesota	0.1
11	Massachusetts	0.0
12	Oregon	-0.1
13	Illinois	-0.4
14	Pennsylvania	-1.3
15	West Virginia	-1.4
16	Wisconsin	-1.5
17	Missouri	-1.8
18	Kansas	-1.9
19	Mississippi	-2.0
20	Oklahoma	-2.1
21	Arkansas	-2.3
22	Louisiana	-2.5
23	California	-2.8
24	Rhode Island	-2.9
25	Delaware	-3.0
26	New Jersey	-3.3
27	North Carolina	-3.7
	United States	-3.8
28	Utah	-4.3
29	South Carolina	-4.6
30	Vermont	-4.6
31	Alabama	-4.8
32	South Dakota	-5.0
33	Indiana	-5.7
34	Montana	-5.7
35	Georgia	-6.5
36	Washington	-6.7
37	Virginia	-6.8
38	Colorado	-7.0
39	Maryland	-7.1
40	Texas	-7.8
41	New Hampshire	-8.2
42	Florida	-8.8
43	Tennessee	-9.1
44	Arizona	-10.5
45	Wyoming	-10.6
46	New Mexico	-12.0
47	Idaho	-13.2
48	Hawaii	-15.1
49	Alaska	-16.4
50	Nevada	-18.3
Source: The Outlook for State and Local Finances: The Dangers of Structural Deficits to the Future of American Education, National Education Association, 1998