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States hit height of boom cycle

Biggest surpluses in 20 years will fund education, criminal justice, environmental projects, tax breaks.

Jesse "the Body" Ventura, Minnesota's governor-elect, will enter the political ring in January with bulging muscles and a bulging state treasury - a $2.2 billion surplus.

Incoming California Gov. Gray Davis will have more than $4 billion of budgetary elbow room, compared with a $14 billion deficit inherited by predecessor Pete Wilson.

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Ohio's Robert Taft will have $1.9 billion of loose cash.

In a story repeated across the United States, governors old and new will enter statehouses in the plushest fiscal shape since 1980, about $34 billion in the black all told. That's close to half the federal government's $70 billion surplus, which remains a giant battleground for congressional Republicans and Democrats. By contrast, most states are already set to start spending, earmarking surpluses for tax and debt relief, education funding, infrastructure upgrades, health care, children, and other pet projects.

"States are in their healthiest position in nearly two decades," says Arturo Perez, analyst for the Denver-based National Conference of State Legislatures. "That is translating into the ability to do multiple projects they have not been able to do in years past and might not have the opportunity to do for much longer."

At the same time, the downward trend of the US stock market - a giant source of capital gains, which feed tax revenues in every state - is a signal that five years of steady surpluses are about to wane. And foreign currency crises from Asia to Russia also mean economic slowdowns that will soon affect the states.

"The states are indeed near the end of a five-year boom cycle," says David Liebshutz, an analyst at the Rockefeller Institute of Government's Center for the Study of States in Albany, N.Y. "We see this as the last peak year of opportunity for states with extra money."

In many states, funding of new projects is on hold until new chief executives take oaths and get administrations in place. In others, statutes mandate that surpluses go to rainy-day funds, tax refunds, and other designated expenditures. Education has been a big winner, with average projections nationwide up more than 7 percent, nearly double the average rate of states' budget increases, which is about 4 percent.

But some states have already passed bills to use monies before new governors and legislatures take office.

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In California, for instance, bills were already passed after the 1998 budget left more than $4 billion in surplus. They include a $245 million purchase of old-growth timberland in Humboldt County. Legislators are also spending nearly $500 million on key water projects, including a new lining for the All-American Canal, which will improve water transfers from north to south. Remedial summer schools have been improved, and juvenile facilities are expanding.

"We were lucky enough to get things pushed through early in this transition year," says H.D. Palmer, an analyst for the state Department of Finance. "These have been programs and projects the governor has wanted for years."

In Ohio, taxpayers come January will notice a 9.3 percent reduction in state income tax, courtesy of a state law that kicks in to deal with surpluses. That will take care of $700 million of the surplus. Another $200 million is earmarked for building schools.

Virginia voters are getting a break on car insurance. New Hampshire is building a new prison. New York is putting its $1 billion surplus into a reserve fund, while Gov. George Pataki (R) designs a long-term strategy to chip away at his state's $35 billion debt - the largest in the nation. The state is also lowering corporate taxes, offering a child-care credit, and cutting auto taxes.

In Washington State, much of a $1.1 billion surplus will go to criminal justice and rural economic development.

Oddly enough, say state number crunchers, having extra money around also has its downsides. One is figuring out how to build the money into a budget without relying on similar funds for succeeding years. The other is not knowing when the current good times will end.

"This is a very confusing time in state finance," says Paulo DeMaria, director of management and budget for the Ohio State Department of Finance. "It's nice to have extra revenues, but frustrating in having to estimate properly without too much optimism or pessimism and fight the battles of being wrong."

Others say there is too much expectation being built up by some politicians who portray fiscal good times that aren't really there. Montana state Rep. Ray Peck (D) made headlines in that state announcing a "whoopee effect" based on the state's $106 million surplus. But state fiscal analyst Clayton Schenck says that money is spoken for by statute - $30 million for reserve funds and another $75 million for existing proposals.

"I would say that Montana has virtually no surplus," says Mr. Schenck. "We are basically at a comfortable level of funding."

Despite such comments and predictions of coming slowdowns, most analysts say the states have gotten solidly back on a track of solvency they were knocked off in the last US recession.

"This might end, but the states have definitely bounced back," says Mr. Perez of the National Conference of State Legislatures. "For context, people must remember the years of 1991 to '93, when many states had no options, were laying off or furloughing employees in droves and cutting major programs just to make it through. Doom and gloom was everywhere, whereas now there is sunshine."

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