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FISCAL SURVEY OF STATES: States’ Fiscal Situations Improve, but Revenue and Spending Remain Below Prerecession Levels

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States’ fiscal situations have rebounded from the depths of the recent recession, but state revenues and spending figures remain below their prerecession levels, according to the Fall 2011 Fiscal Survey of States, released on November 29 by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

Although the report finds some financial improvements for states, including rising tax collections, growing general fund expenditures, and a slow restoration of state rainy day balances, the fact that states continue to be below prerecession revenue and spending levels “demonstrates the continuing significant impact of the economic downturn and the current tepid growth in the national economy,” the report says.

“This report shows that state budgets are certainly improving, however growth is weak and there is not enough money for all of the bills coming in,” said NASBO Executive Director Scott Pattison. “State officials will still be cutting some programs and increases in funding for any program except for health care will be rare.”

According to the report, spending on Medicaid is expected to consume an increasing share of state budgets and grow more rapidly than state revenues. As a result, states are likely to “face tight fiscal conditions for the foreseeable future,” the report finds.

Based on estimates contained in this year’s report compared to last year’s, the percentage of general fund spending on elementary and secondary education, as well as higher education, has declined while spending on Medicaid has increased. Specifically, NGA and NASBO estimate that 35.0 percent of states’ general fund spending will go toward elementary and secondary education in Fiscal Year (FY) 2011, compared to an estimate of 35.7 for FY 2010. For higher education, they estimate spending at 11.5 percent of general fund expenditures for FY 2011, compared to 12.1 percent in FY 2010. Meanwhile, the Medicaid component of general fund expenditures is estimated to grow from 15.4 percent in FY 2010 to 17.4 percent in FY 2011.

“While fiscal 2012 state-enacted budgets show a combined $19.4 billion increase in general fund spending for Medicaid, general fund spending on higher education was reduced by $3.2 billion,” the report notes. “Additionally, although K–12 education saw an overall increase in funding, there were twelve states which enacted reductions in K–12 general fund spending.”

Additionally, states are facing a “squeeze” as federal support declines while pressure increases from local governments for additional aid and a restoration of previous funding cuts. “State governments are feeling the squeeze from the demands for spending from both local and federal governments,” said NGA Executive Director Dan Crippen. “Revenues are up slightly, but they do not yet meet 2008 levels, and the reduction of federal funds compounds the fiscal challenges for states.”

The recovery in state finances began in FY 2011, when thirty-eight states reported higher general fund spending than the year before. For FY 2012, forty-three states have enacted budgets with higher general fund spending than those enacted in FY 2011. Overall, general fund expenditures in FY 2012 will total $666.6 billion, a 2.9 percent increase over FY 2011. Even with the increases, however, general fund expenditures are still $20.7 billion, or 3 percent, less than the prerecession high of $687.3 billion in FY 2008.

State revenues in FY 2012 are expected to be $659.4 billion, a 1.6 percent increase over FY 2011, but $20.8 billion less than in FY 2008. With revenues trailing spending, states will continue to face budget gaps; between FY 2009 and FY 2011, states reported $230 billion in budget gaps. In FY 2012, states had to close a combined $95 billion in budget gaps, and although not all state budget offices have completed official forecasts, seventeen states have already reported a combined $40 billion in budget gaps for FY 2012, which begins July 1, 2012.

To close budget gaps, states were forced to make a combination of spending cuts and increases in revenues (i.e. taxes); some states borrowed money from “rainy day” accounts. In FY 2011, the program areas where many states made mid-year general fund expenditures cuts were K–12 and higher education. Specifically, eighteen states reduced spending on K–12 while nineteen states cut higher education.

Fall 2011 Fiscal Survey of States is available at http://www.nga.org/files/live/sites/NGA/files/pdf/FSS1111.PDF.

Categories:

Economic Impacts

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