States' revenue forecasts increasingly off-base

By Michael Connor

(Reuters) - Revenue forecasts made by America's state governments are increasingly missing the mark, a trend that is aggravating political, fiscal and social pain as most of the 50 states grapple with budget shortfalls, according to two leading think tanks.

The widening mistakes in revenue forecasts, which added up to $49 billion in fiscal year 2009, were due more to shifts in the economy than to wrongheaded experts.

"The main cause of the increase in volatility appears to be the state's growing reliance on income taxes and the ways in which highly volatile capital gains affect income tax revenue," the Pew Center on the States and the Nelson A. Rockefeller Institute of Government said in a new study.

Lawmakers and governors are now in budget-writing season and are looking at forecasts that revenue across all 50 U.S. states will be at least $100 billion shy of costs in fiscal 2012, which begins for most states on July 1. Policy makers use the estimates to set spending for schools, roads and healthcare,

Budget conflicts caused by gaps between expected tax collections and other revenues and spending on basic services, such as fire-fighting and teaching, are fueling headline-making standoffs in Wisconsin and other states.

The budget fights also cast a pall over America's $2.8 trillion municipal bond market, even as a new poll found that government finance experts see no jump in municipal bond defaults during 2011 from last year.

According to the study released on Tuesday, the states as a group overestimated revenue by at least 10.2 percent in fiscal 2009 -- the first full fiscal year of America's worst recession in generations.

The median estimating error over the 23 years from 1987 to 2009 covered by the study was 3.5 percent and included 16 years of underestimates that helped produce surpluses. North Carolina, Oregon, New Hampshire and Arizona had forecasting errors in fiscal 2009 of at least 25 percent.

According to the study, 25 percent of all state government forecasts fell short by 5 percent or more during the 1990-92 economic downturn; 45 percent of forecasts were off by that much in 2001-2003; and 70 percent of all forecasts were too high by at least 5 percent in fiscal 2009.

"If elected officials don't get good revenue forecasts, they're not only forced to change their budgets and tax policies after they learn about errors, they're also contributing to citizens' skepticism," said Thomas Gais, director of the Rockefeller Institute in Albany, New York.

The study looked at income taxes, sales taxes and corporate taxes, which comprise 72 percent of revenues for the states as a whole, and found that the scale of revenue overestimates worsened in each of the three recessions over the 23 years.

Sales taxes proved extremely volatile in fiscal 2009, especially in Florida and other states that have no personal income taxes.

Sales taxes came in 7.6 percent lower than forecast in 2009, compared to an error rate of 0.3 percent over all 23 years, according to the study that attributed the quickening shifts in revenues to increasing reliance on income taxes by state governments.

State government revenues typically trail falls and rises in the overall economy and looked poised to improve, according to a poll of municipal finance professionals released on Tuesday by RBC Capital Markets.

The poll of 100 people at a public finance conference last week found that 27 percent saw state and local government revenues returning to pre-recession levels over the next two years. That's up from just 3 percent in a similar poll by the investment bank in October.

(Reporting by Michael Connor; Editing by Leslie Adler)