National Governors Association NGA's Scheppach says 'subprime' housing problems are affecting state finances.

States' spending and revenue will continue to rise this year, but problems in the housing market and other economic pressures will slow that rate of growth from last year's levels, says a new survey from the National Governors Association and National Association of State Budget Officials.

The organizations' latest Fiscal Survey of the States, released Dec. 5, says states' total operating spending will climb 4.7% in fiscal 2008, which for most states started last July 1. That's down from a 9.3% increase in 2007.

On the revenue side, the NGA-NASBO survey, produced twice a year, shows that states' 2008 budgets foresee a 2.9% gain in revenue from sales taxes and personal and corporate income taxes, compared with 2007's level. Last year's tax revenue was up 5.6% from 2006.

"The trend lines are all moving downward," says Scott D. Pattison, NASBO executive director.

The survey doesn't address states' capital budgets, but NGA Executive Director Raymond C. Scheppach says capital spending is an area where budget pressures will prompt states to hold back, either by stretching out contracts or putting off new project starts.

NASBO's Pattison adds that when fiscal times are good, states tend to use their cash for capital projects, but as conditions tighten up, states will turn much more to debt financing. He also foresees more use of "creative financing" for capital projects, along with increased consideration of toll roads and other alternative funding for non-transportation infrastructure.

Operating budget balances and "rainy day" funds are "still very healthy," says Pattison, but they also are getting smaller. States' enacted budgets for fiscal 2008 total $46 billion, or 6.7% of aggregate spending, according to the survey. That's down from $63 billion in balances in 2007, or 9.6% of expenditures.

In fiscal 2007, 38 states exceeded their revenue targets. But NGA's Scheppach says that already about 15 states have announced budget shortfalls for the current fiscal year, and he expects at least five more states to make similar announcements over the next several months.

"A lot of it is due to the 'subprime' housing market," Scheppach says. With fewer people "trading up" and buying bigger houses, he says that puts a crimp in sales of such things as furniture and carpets and means less sales tax income for states. He says the housing-sector impact has been especially pronounced in states like California, Arizona, Nevada and Florida, which had benefited greatly when housing was soaring.

Scheppach says, "We're seeing a lot of differences across the states." Though housing's problems have hurt several states, he says that the drop in the value of the U.S. dollar has been a plus for exports from farm states and also helped non-automotive manufacturing, such as farm equipment. High oil prices are squeezing many states, but oil-producing states are benefiting, Scheppach adds.

Looking ahead, Pattison says that in areas like corrections and infrastructure, "We're looking at some really significant expenditure pressures on states…for years to come."