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FISCAL SURVEY OF STATES: New Report Finds Improving State Budgets, but Looming Challenges

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“While the report highlights improvements in states fiscal conditions, it also shows the many challenges and tough decisions states will face over the next few years as they fully recover from the economic downturn.”

Fiscal conditions in states are improving, but have not returned to prerecession levels of 2008, according to a new report from the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO). The report, The Fiscal Survey of States, finds that state spending is expected to increase next year by 2.6 percent after rising 5.2 percent this year, but even with those increases, spending will be $19 billion lower during fiscal 2012 than it was in fiscal 2008, a 2.7 percent decrease.

“The greatest short-term risk to states’ recovery comes not from statehouses, but from Washington,” said NGA Executive Director Dan Crippen. “While these numbers hopefully mark a turning point in states’ recovery, their fiscal health is not likely to return to prerecession levels for some time. The long-term risks to state budgets and our country far overshadow any short-term growth. As states look ahead, it is not just the economy that gives them pause, but also the aging of our population and the seemingly inexorable increase in health care costs.”

The report also points out that states will enter fiscal 2012 without billons of dollars in support from the American Recovery and Reinvestment Act (ARRA), or stimulus bill, that they received from the federal government over the last few years. According to the report, states made use of $135 billion in flexible emergency funding through ARRA in fiscal 2010 and 2011. To help boost revenue, governors have proposed $13.8 billion in new net taxes and fees for fiscal 2012.

For fiscal 2010, the most recent year for which data is available, Medicaid spending is estimated to account for about 21.8 percent of total spending—the single largest portion of total state spending. The report finds that spending on Medicaid increased by 7.9 percent in fiscal 2010 and is estimated to grow by 11.2 percent in 2011 due to increases in enrollment that came as a result of the economic downturn.

Elementary and secondary education spending, at 20.8 percent, represents the next-largest portion of state spending, followed by higher education (10.1 percent), transportation (8.1 percent), corrections (3.1 percent), public assistance (1.7 percent), and all other expenditures (34.4 percent).

Because education spending makes up such a significant portion of state budgets, it was a frequent target for cuts. According to the report, eighteen of the twenty-three states that made mid-year budget cuts in fiscal 2011 reduced spending on K–12 education; eighteen states cut higher education as well.

“While the report highlights improvements in states fiscal conditions, it also shows the many challenges and tough decisions states will face over the next few years as they fully recover from the economic downturn,” said Scott Pattison, executive director of NASBO.

The complete report is available at http://www.nga.org/Files/pdf/FSS1106.PDF.

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