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NASBO Reports State Fiscal Conditions Getting Better

DEC 10, 2013 8:00am ET
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Financial conditions in the U.S. states are continuing to get better with fiscal trends indicating continued modest growth and stability in the coming year, according to a report released today by the National Association of Budget Officers.

NASBO, which surveyed all 50 states from August through October, found that their situation in fiscal year 2014 is modestly better as signs of fiscal stress lessen. Most states expect to see revenue and spending growth in fiscal 2014 with both projected to rise above fiscal 2013 levels, according to the Fall Fiscal Survey of States.

Meanwhile, the state employment outlook deteriorated slightly in fiscal 2013, with states planning to further cut the number of their full-time employees in fiscal 2014.

In fiscal 2013, the number of full-time state employees fell by 0.19%, with 19 states cutting the number of full-time equivalent positions. Based on enacted budgets, the total number of full time employees is projected to decrease by 1.87% in fiscal 2014, NASBO said.

This trend may continue into the next few fiscal years.

"I would expect we will not see a significant increase in state employment for the foreseeable future," Scott Pattison, NASBO Executive Director, said during a conference call today. 

Tax Collections

In fiscal 2013, tax collections outperformed projections as revenues grew steadily in most states. Although revenues are expected to increase in fiscal 2014, states are not forecasting a rise comparable to fiscal 2013. Revenues increased by 5.7% in fiscal 2013 and states predict revenues will rise only 0.8% in fiscal 2014.

This potential softening in tax collections may pose budgetary pressures for states in areas directly impacted by sluggish growth in the economy such as health care, higher education, and aid to local governments, NASBO said.

Fiscal challenges from the modest economic recovery are likely to linger, but these setbacks are not expected to cause significant budget volatility for states in fiscal 2014, the report said.

The report also showed that improvements are widespread across the United States with 43 states enacting higher spending levels in fiscal 2014.

Aggregate spending levels are also expected to rise in fiscal 2014, although less than the historical average. This means that for most states, spending growth will be very limited and there will be few additional budget dollars available, NASBO said.

Modest Revenue Growth Seen

“Many states ended fiscal 2013 with a budget surplus, helping to provide some cushion from potentially slower revenue growth this fiscal year,” the report says. “Fiscal 2014 revenues are not projected to rise by growth rates comparable to fiscal 2013 partly because states experienced a one-time gain last fiscal year as some taxpayers took actions to avoid higher federal tax rates that were set to begin on January 1, 2013. A similar occurrence is not likely as Congress passed the American Taxpayer Relief Act of 2012, providing greater certainty of federal tax rates going forward.”

According to the Rockefeller Institute of Government’s State Revenue Report released Monday, inflation-adjusted tax collections at the end of fiscal 2013 for the first time surpassed the peak level reported in fiscal 2008 by 0.7%. However, the Institute said this was the result of the tax anomaly.

“Most of the growth in fiscal 2013 was because of artificially boosted personal income tax collections. In fact, inflation-adjusted sales tax collections in fiscal 2013 were still 2.9% below the recessionary peak levels reported in fiscal 2008,” the Institute said in a press release. “Moreover, inflation-adjusted figures indicate that 28 states still had lower tax receipts at the end of fiscal 2013 compared to fiscal 2008.”

NASBO in its report said that after several years of recovery, there are seeing noticeable improvements in the state budget environment. Both budget cuts and gaps have decreased, states have enacted net tax cuts in two of the last three fiscal years and revenue collections have outpaced projections.

But fiscal rebuilding for many states will be slow and the recovery remains precarious.

“The lingering effects of the recession are still present, as a number of states have yet to surpass pre-recession revenue and spending levels in nominal terms. For many states, operating budgets also face pressures from spending needs in areas such as transportation and infrastructure, as well as pensions and retiree health care,” the report said. “Therefore, uncertainty and significant disruptions from the economy or the federal government can have profound impacts on current state finances. 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. “

Employee Compensation

On employee front, there were some bright spots seen.

The recession adversely impacted state employee compensation and since fiscal 2010 many states trimmed employee benefits, enacted salary freezes and in some cases carried out salary cuts.

But in an about-face for fiscal 2014, 25 states have authorized across-the-board salary increases and 14 states have approved broad-based merit increases. Other compensation changes include one-time bonuses, longevity payments, changes to health and retirement benefit packages, and additional pay for performance.

NASBO said that fiscal 2012 data in the report represents actual figures, fiscal 2013 figures are preliminary actual data, and fiscal 2014 data reflect state enacted budgets. Forty-six states begin their fiscal years in July and end them in June. The exceptions are New York with an April to March fiscal year; Texas with a September to August fiscal year, and Alabama and Michigan with October to September fiscal years. Also, 20 states operate on a biennial budget cycle.

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