States See Rising Revenues

WASHINGTON — State revenues are expected to rise in fiscal years 2011 and 2012, but a record jump in Medicaid costs, combined with voters’ reluctance to take on new debt, could keep states from issuing bonds for infrastructure and other investment projects, officials and market participants said Thursday.

They made their remarks as two groups — the National Governors Association and the National Association of State Budget Officers — released their biannual Fiscal Survey of the States report showing that while many states are recovering from the recession, their revenues and expenditures are still below 2008 levels.

The report found that after a few years of heavy budget ­pruning, some governments could see budget surpluses heading into fiscal 2012, which begins on July 1 for 46 states.

Forty-four states expect to meet or exceed their revenue estimates for fiscal 2011, according to the report. With the revenue improvements, governors have proposed fiscal 2012 budgets that call for general fund expenditures to total $668.6 billion, an increase of 2.6% from the $651.5 billion spent in fiscal 2011.

Fiscal 2012 tax revenues are expected to rebound to $655.6 billion, an increase of 2.1% from the $642 billion collected in fiscal 2011, though some of the revenue gains come from tax increases or extensions of expiring taxes that governors are pushing their legislatures to approve.

States “are seeing growing revenues,” Scott Pattison, NASBO’s executive director, told reporters during a press conference.

But even with stronger revenues, some governments will have to maintain fiscal austerity.

While states closed nearly $230 billion in budget gaps between fiscal 2009 and fiscal 2011, 10 states reported nearly $12.1 billion of lingering shortfalls for fiscal 2011. So far, 33 states are projecting $75.1 billion in budget gaps for fiscal 2012 and 21 states said they expect $61.8 billion in shortfalls for fiscal 2013.

However, a sharp increase in Medicaid costs could divert spending for capital projects, officials said. For fiscal 2012, governors have projected an 18.6% increase in Medicaid spending. The increase is due to the June 31 expiration of the enhanced Medicaid match rate provided by the American Recovery and Reinvestment Act.

NGA executive director Dan Crippen said Medicaid spending has become the largest cost for many states, and that he can’t remember a year when states increased Medicaid spending by 19%.

The health care costs “are taking money” from state general fund infrastructure investments, according to Pattison. As a result, he said, states may lack the “sufficient funds to issue the debt” for infrastructure projects.

Long-term municipal bond issuance, which is down 51% through the end of May compared to the first five months of 2010, may rebound later this year if revenues stay strong, Crippen said.

States “may find at that point more willingness to go to the market,” he said. “The market remains relatively robust” and there is an appetite “on the buy side” for state debt, he said.

But the drought in issuance may linger even with the bounce in revenue, according to some market participants.

State issuers “are still being very careful about borrowing money these days,” said Christopher Johns, senior vice president for Kirkpatrick Pettis Capital Management in Denver who manages two state-specific mutual funds that invest in Colorado and Oregon munis.

Though tax collections have picked up, making for more favorable the credit conditions, “most of these issuers are still very conservative,” Johns said. “I don’t think there will be a big increase in supply at all” this year, he added.

Bond issuance likely will be curtailed by political forces as well, according to Johns. In Colorado, school bonds most pass by a voter referendum. Historically, these referendum votes were approved by about 80% of the voters, but for the past two years, the approval rate has dropped to “more like 50%,” he said.

“The voter mood has changed pretty significantly,” Johns said.

States face additional funding pressures from the federal government, Crippen said. As some members of Congress look to rein in government spending, states could see a cut back in grant funding, he said.

Over the long term, state tax revenues will take a hit from shifting consumer sentiments as more buyers go online. Many online purchases are not taxed at the state level.

“The question is, does the Internet need that kind of subsidy?” Crippen said. “There will be a temptation by Congress to create loopholes in state tax bases as well.”

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