General fiscal recovery continued last year for most of the nation's states, but many are budgeting as if in recession because of meager cash reserves, fear of another economic downturn and uncertainty about future federal tax and budget policies, state officials reported yesterday.
"The financial health of states improved somewhat in fiscal year 1985 but the recovery has weakened, and a number of states face continuing budget problems," the National Governors' Association and the National Association of State Budget Officers said in releasing an annual fiscal survey of the states.
New England, Great Lakes and Middle Atlantic states generally have rebounded strongest from the last two recessions, and the South has done well, too, the report found.
But the report said that the continuing agricultural crisis has slowed recovery in many Plains states, that some Southwest and Rocky Mountain states and Alaska are hampered by losses in mineral and energy revenues and that many Northwest states are ailing along with that region's timber industry.
Moreover, the fiscal future of all states could hinge in large measure on the outcome of battles between the White House and Congress.
Efforts to reduce the federal deficit have cut deeply into the budgets for state aid programs and have left the states to shoulder larger shares of the costs of some programs.
President Reagan's proposed tax-revision package also could affect the states. The package's biggest single source of new revenue is the proposed elimination of the deduction for state and local taxes. Another part of the plan would reduce the tax exemptions for municipal bonds sold to finance capital works projects.
Maryland and Virginia have "relatively strong" economies and budget balances that are "not large but are positive," said Gerald H. Miller, executive director of the state budget officers group. The study projected an $11 million year-end balance for Maryland in fiscal 1985 and a perfectly balanced budget for Virginia.
The District of Columbia was projected to have $20 million on hand at the end of fiscal 1985 -- enough to reduce a budget deficit accumulated from the pre-home rule era from $270 million in 1984 to $250 million in 1985. "The District situation is improving," Miller said.
The survey, concluded just before most states finished their 1985 fiscal year June 30 and thus based partly on projections, forecast that about two-thirds of the states would finish the year with cash on hand in the general fund. The projected cumulative balance was $5.4 billion, about half of it concentrated in California, New Jersey, Minnesota and Wisconsin.
The cumulative balance was equal to about 2.9 percent of the total expenditures. Accountants generally consider 5 percent as a sign of reasonable fiscal health. The report projected that in 1985 nearly half the states would have balances of 1 percent or less.
In the 1984 fiscal year, the cumulative balance was $5.6 billion, or 3.3 percent of that year's expenditures. The estimates for 1986, when the last of the temporary taxes imposed during the recession are to expire, is a $4.2 billion balance or 2.1 percent of expenditures.
The survey reported that 27 states maintained municipal "rainy day" accounts to bolster them against unexpected fiscal pressures, and the total amount in those accounts doubled between 1984 and 1985. Short-term borrowing to make ends meet declined in 1985, and 15 states cut or planned to cut taxes while 23 states increased them or planned to do so.
State governments generally continued to rein in spending, the report found. When added and adjusted for inflation, their budgets increased 5.7 percent from the 1984 level compared with an 8 percent increase for the federal government between 1984 and 1985.