WASHINGTON — States are facing a "big squeeze" of slow economic growth, the need for increased spending on Medicaid and other programs, the loss of federal funds and requests for help from cash-strapped local governments, two groups said in a report released Tuesday.
"There's a squeeze from virtually every side that states are facing," Dan Crippen, executive director of the National Governors Association, told reporters in a telephone briefing on the results of the Fall 2011 Fiscal Survey of States that the NGA released along with the National Association of State Budget Officers.
The findings of the survey have "mixed" implications for municipal bond financing, Crippen said when asked about the issue during the briefing.
On the one hand, fiscally challenged states may be reticent to issue bonds and increase their debt, he said. On the other, there will less discretionary spending for transportation and other programs and states may turn to bonds to finance those needs.
"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."
"State governments are feeling the squeeze from the demands for spending from both local and federal governments," said 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 group's report cited the withdrawal of stimulus funds provided through the American Recovery and Reinvestment Act of 2009 as well as the expected federal spending cuts expected to occur in 2013 through sequestration following the congressional supercommittee's failure to find $1.2 trillion in deficit reductions over 10 years.
The two groups said Medicaid is one of the biggest challenges facing states.
While overall state spending is expected to grow slowly over the next few years, spending on Medicaid is expected to consume an increasing share of state budgets and grow more rapidly than state revenues because of increased demand from the economic downturn and the loss of additional federal funds associated with ARRA and the Affordable Care Act, the report said.
The survey, conducted twice a year, presents aggregate and individual data on states' general fund receipts, expenditures and balances. Forty-six states have fiscal years beginning in July and ending in June.
The exceptions are Alabama and Michigan, with October to September fiscal years, New York, with an April to March fiscal year, and Texas, with a September to August fiscal year. In addition, 21 states operate on a biennial budget cycle, according to the report on the results of the latest survey.
There has been some slow improvement in state fiscal conditions that is expected to continue in fiscal 2012, which runs through June of next year. Forty-three states enacted fiscal 2012 budgets with higher general fund spending than in fiscal 2011, the second such annual increase, according to the report. That is a big improvement over fiscal 2010 when 43 states with enacted budgets saw declining levels of spending.
Overall, state budgets for this fiscal year call for $666.6 billion in general fund expenditures, a 2.9% increase compared to fiscal 2011 spending of $648.1 billion, which was a 4.0% increase over the $623.4 billion spent in fiscal 2010, the report found.
However, the general fund spending total projected for fiscal 2012 is still $20.7 billion or 3.0% less than the pre-recession high of $687.3 billion in fiscal 2008, according to the report. And historically, budget growth has averaged 5.6% a year, Pattison said.
State budgets for fiscal 2012 forecast total general fund revenues of $659.4 billion, 1.6% above the $649.0 billion collected in fiscal 2011.
"Although state general fund revenues are expected to increase in both fiscal 2011 and fiscal 2012, the drastic declines in revenue collections experienced in fiscal 2009 and fiscal 2010 means that total general fund revenues in fiscal 2012 will still be $20.8 billion below their fiscal 2008 level," the report said.
State enacted budgets for fiscal 2012 reflect a 0.3% decrease in sales tax revenue, which accounts for 33% of general fund revenue.
The decrease is mainly due to the end of temporary sales tax increases in a few states, according to the report. The budgets reflect a 5.2% increase in personal income tax revenue, which accounts for 40% of general fund revenue, and a 0.1% decrease in corporate income tax revenue, which accounts for 7%.
The slow recovery of state revenue streams continues to result in significant gaps between projected spending and revenue collections. Although not all states have completed official forecasts, 17 are projecting budget gaps that total $40 billion for fiscal 2013, according to the report.
Pattison noted that 14 states have very, very low reserves in rainy-day funds.
