4Q Sees 6.9% Revenue Boost, Rockefeller Report Says

State revenues increased 6.9% in the fourth quarter of 2010, capping a full year of revenue growth and easing concerns that states should be able to file for bankruptcy protection, according to officials at the Nelson A. Rockefeller Institute of Government, which issued a report Tuesday.

Personal income tax and sales tax receipts, the two largest sources of revenue for states, jumped in the fourth quarter, gaining 10.7% and 6.0% respectively from the year-earlier period, according to the report.

The stronger revenue figures may defuse the state fiscal concerns held by some members of Congress, said Donald Boyd, who co-authored the report. A House Committee on Oversight and Government Reform panel and the House Judiciary Committee are planning to hold hearings soon on states’ fiscal conditions and whether they should be permitted to file for bankruptcy protection. Some Republicans have suggested that bankruptcy filings could allow states to renegotiate their debt, pension plans, union contracts, and other obligations.

The revenue figures “clearly ought to ease some of the bankruptcy concerns as far as the near-term revenue outlook is concerned,” Boyd said.

Still, states face large fiscal 2012 budget gaps and the revenue outlook will depend on the unemployment rate, he said.

However, the revenue trend is encouraging. The October-to-December period of 2010 was the fourth consecutive quarter for year-over-year state revenue growth. The fourth-quarter period indicates state revenues “are in a generally rising pattern,” Boyd said. “We do expect moderate revenue growth” in 2011.

Stronger state revenues may ease fears that the lack of new federal stimulus will hurt fiscal 2012 budgets, Boyd said. States in fiscal 2012 will not have about $50 billion of funds provided by the American Recovery and Reinvestment Act of 2009, he said. Specifically, if states can pass fiscal 2012 budgets without calls for federal aid, then they may dilute the bankruptcy concerns.

Another key source of concern — unfunded pension liabilities — will not be as easily solved by stronger revenue figures, Boyd said. This issue “is not going away quickly,” he said.

In California, the largest state bond issuer in 2010, revenue increased 19.3% from the year-earlier period, according to the report. Six states reported revenue declines and nine states did not have fourth-quarter revenue data available.

State revenue data for the third quarter was revised higher to a 4.5% increase from the 3.9% gain estimated by the Rockefeller Institute on Nov. 30.

States may find their fiscal 2011 revenue undermined by the Bush tax cuts extension. President Obama in December signed into law an extension through 2012.

Before the extension, states were hoping to get a boost in capital gains tax revenues, Boyd said. States factored into their revenue estimates an expectation that investors would sell securities ahead of the tax cut expiration on Dec. 31, 2010. With the extension, states may not realize this boost in fiscal 2011, he said.

Additionally, states may face growing Medicaid costs, a lagging concern that may begin to show up in 2011, according to Boyd.

Workers who lost their jobs and health benefits earlier in the recession may be becoming eligible for Medicaid, requiring states to spend more, he said.

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