After several years of large budget gaps and drastic cuts in spending to close them, fiscal distress is beginning to subside for most states, according to The Fiscal Survey of States, released last month by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO). Even with the improving economic environment, however, the unemployment rate remains high and economic recovery is “relatively weak,” compared to other post-recessionary periods, the report warns. As a result, most states are expected to only “moderately” increase spending in Fiscal Year (FY) 2014.
According to the report, state general fund spending is projected to be $728 billion in FY 2014, an increase of 4.1 percent over FY 2013 and higher than the $687.3 billion in FY 2008—marking the first time that general fund spending passed pre-recession highs. When taking inflation into account, however, FY 2014 totals remain below the pre-recession high and would need to be approximately 4 percent higher to match FY 2008 spending levels.
“State spending in fiscal 2013 is still below the fiscal 2008 pre-recession peak,” said NGA Executive Director Dan Crippen. “Lower real-spending levels in fiscal 2013 compared to fiscal 2008 indicate that state budgets are not growing fast enough to make up for recession-induced declines and inflation.”
Additional challenges states expect to face in FY 2014 include slow revenue growth and a heightened pressure to spend, especially in areas directly impacted by the sluggish economy, such as Medicaid, higher education, and corrections, the report notes. States must also provide resources for programs that were cut during the recession and address declining federal funds for state programs subject to sequestration.
Even with these challenges, the report finds that states are in a better fiscal position to increase spending for some program areas in FY 2014. It specifically mentions K–12 education, which “experienced significant reductions during the recession.” At the same time, the report warns that new spending priorities are likely to be “curtailed” by health care–related expenditures and future health-care spending demands. Costs for pensions and health care for state employees are also expected to provide additional budgetary demands over the long run.
The decreasing frequency and dollar amounts associated with state budget gaps further demonstrate how far state economies have come. In FY 2011, thirty-one states were facing a combined $78.2 billion in budget gaps. In FY 2013, only eighteen states faced budget gaps and the total budget gap—$33.3 billion—was much lower. For FY 2014, thirteen states are projecting a total of $6.8 billion in budget gaps.
The complete report is available at http://www.nga.org/files/live/sites/NGA/files/pdf/2013/FSS1306.PDF.