NASBO: States Improving, but Fiscal Rebuilding Remains Slow

WASHINGTON — State fiscal conditions are modestly improving in fiscal 2014, but for many states rebuilding “remains slow and somewhat precarious,” the National Association of State Budget Officers said in a report released Tuesday.

“States are building on the fiscal improvements made over the last several years, but sluggish economic growth, federal actions and looming long-term issues continue to have implications for state operating budgets that are slowly on the mend,” NASBO said in its fall fiscal survey of states.

“The bottom line is there’s simply not enough money to go around for all state government functions in terms of the desires, needs, wants, requirements of additional state spending,” NASBO executive director Scott Pattison told reporters.  Most state legislatures are meeting in 2014 and 36 states will be having gubernatorial elections, and politicians will have to make some “tough choices,” he added.

The report is based on a survey conducted by NASBO from August through October that was completed by executive state budget officers in all 50 states. Most of the states’ fiscal years are from July to June, with fiscal 2014 already having begun. Fiscal 2013 data represents preliminary actual figures, and fiscal 2014 data reflects states’ enacted budgets.

Modest state fiscal improvements are widespread, with 43 states enacting higher spending levels in fiscal 2014 than they in fiscal 2013, according to the report. Enacted fiscal 2014 budgets show aggregate general fund expenditures increasing by 3.8% over the previous year’s levels. However, this spending increase is below the historical average growth rate of 5.6%.

“This means that for most states, spending growth will be very limited and there will be few additional budget dollars available,” the report said.

In the two-year period from fiscal 2012 to fiscal 2014, state budgets have increased by 8.2%. However, some states have enacted fiscal 2014 spending plans below their pre-recession peak in nominal terms, and aggregate state spending in fiscal 2013 remained below the fiscal 2008 pre-recession peak when inflation is taken into consideration, according to the report.

General fund spending increases in fiscal 2014 were most heavily targeted toward K-12 education and Medicaid, NASBO said. States also enacted spending increases for higher education, transportation and correctional systems. The only major program area that received net budget cuts in fiscal 2014 was public assistance.

State budget gaps and mid-year budget cuts have decreased compared to the years during and immediately after the recession, the report said. Most states had yet to determine if they were going to made mid-year budget cuts to their fiscal 2014 spending plans at the time of data collection.

Most states anticipate revenue growth in fiscal 2014, although for states are not projecting an increase in tax collections that is comparable to gains in fiscal 2013. While revenues rose by 5.7% in the last fiscal year, they are only projected to increase by 0.8% in fiscal 2014. The smaller increase in revenues would be partly due to the fact that states experienced a one-time gain in fiscal 2013 because some taxpayers took actions to avoid higher federal tax rates that were set to start on Jan. 1, 2013, the report said. Going forward, there is more certainty about federal tax rates because the American Taxpayer Relief Act of 2012 was enacted.

State revenues have increased 6.5% in the two-year period from fiscal 2012 to fiscal 2014. However, 14 states enacted budgets in fiscal 2014 with lower nominal general fund revenues than in the last fiscal year before the recession, and aggregate revenues remain below the pre-recession highs after accounting for inflation, NASBO said.

States cut taxes and fees by $2.1 billion in fiscal 2014 — the second time in three years that they have enacted net tax cuts, the report said.

Revenues outpaced projections in fiscal 2013, leading to a sizable increase in ending balances that brought total balances to 9.6% of general fund expenditures. Fiscal 2014 general-fund revenues are exceeding original forecasts in 14 states, on target in 23 states, and below projections in seven states. However, enacted fiscal 2014 budgets show total balances falling to 8.2% of general fund expenditures, NASBO said.

Many states’ operating budgets face pressures from the need for spending on transportation, pensions and retiree health care. “Therefore, uncertainty and significant disruptions from the economy or the federal government can have profound impacts on current state finances,” the report said.

NASBO president and Oregon chief financial officer George Naughton said that states have been dealing with federal uncertainty both in the short-term and in the long run. States dealt with short-term uncertainty during the federal government shutdown in October and states are concerned in the long run about changes to programs like Medicare and Medicaid.

Despite low interest rates, a high demand for infrastructure and expectations that there will be fewer funds for states from the federal highway trust fund, Pattison said he does not expect a significant increase in issuance.

“There does seem to be an aversion to debt in a lot of states,” he said. “You saw even some voters turn down some bonds in the last election that you might have otherwise see them pass.”

Also, some interest rates for municipal bonds are rising, which is decreasing the “equivalent of refinancing,” Pattison said.

While any increase in issuance is unlikely to be significant, Pattison does anticipate continued growth in state debt issuance at least over the next couple of years.

Naughton said that Oregon had some fairly significant debt issuance in the past few years, but that issuance has slowed down in terms of what the state legislature approved for 2013 to 2015.

“We’re still issuing debt, we’re just not issuing as much as we did say two to four years ago.”

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