WASHINGTON — States are hard-pressed to meet spending needs in key areas like education, health care and infrastructure, as budgets and finances have been slow to recover from the Great Recession, a report issued Tuesday found.
"Requirements for spending on K-12 education, health care and other important areas continue to grow, often at faster rates than state revenue growth," the National Association of State Budget Officers said in its spring 2015 fiscal survey of states. "Long-term critical challenges include pent-up demand for spending on infrastructure and rising pension and health care costs."
While state budgets are expected to grow in fiscal 2016 for the sixth straight year, "the growth is very modest" and not robust like it would be during an economic boom, said NASBO executive director Scott Pattison.
States' slow revenue growth "has forced persistent spending austerity," said Matt Fabian, a partner at Municipal Markets Analytics. This is probably positive for credit quality, but NASBO's report "isn't encouraging for infrastructure or new [money] issue supply," he said.
Not only are states' recoveries from the recession modest, but they are facing uncertainty over the amount of federal aid that they will receive, if any, said Frank Shafroth, director of George Mason University's Center for State and Local Government Leadership.
He said there's a "better-than-even chance" of a federal government shutdown in October, since Congress is running out of time to pass its appropriations bills that include funding for states. The uncertainty over federal aid makes it harder for states to plan their budgets, Shafroth said.
Also, a pension issue that's "becoming increasingly important to states" is that retired government employees are living longer than actuaries predicted while state have fewer people contributing to pension systems due to layoffs during the recession, Shafroth said.
NASBO conducted its spring 2015 fiscal survey from February through April, and state executive budget offices in all 50 states completed it. Fiscal 2014 data in the survey are actual figures, 2015 data is estimated and the 2016 data reflects governors' recommended budgets. Most states' fiscal years start July 1.
General fund expenditures are projected to increase by 3.1% in fiscal 2016. This figure is a slower rate than the estimated 4.6% increase in 2015 and the historical average increase of 5.5%, NASBO said.
Governors in 42 states proposed budgets with higher spending levels in fiscal 2016 than 2015, and eight states recommended budgets for 2016 that haven't surpassed pre-recession peaks in nominal dollars, according to the report.
Recommended spending increases for fiscal 2016 "most heavily target K-12 education and Medicaid," NASBO said. Governors also recommended net spending increases for higher education, corrections and public assistance. They recommended net reductions in general fund spending on transportation, but most states primarily rely on other sources to finance spending in this area, according to the report.
Aggregate general fund revenues are expected to increase by 3.0% in fiscal 2016. This is a somewhat slower growth rate than the estimated 3.7% increase for FY-2015 but higher than the 1.6% gain in 2014.
Total general fund revenues have been higher than the pre-recession high in nominal terms each year since fiscal 2013, but projected revenues in governors' budget proposals are still below pre-recession peaks in five states without adjusting for inflation, according to the report.
Nineteen states' general fund revenues are expected to exceed the most recent forecasts for fiscal 2015, 23 states' revenues are on target and seven states' revenues are below their updated projections. More states are expected to meet or exceed their 2015 revenue projections once the final tax collections are determined because of higher than anticipated tax collections in April, according to the report.
For fiscal 2016, governors proposed a mix of tax increases and decreases. The proposed increases were mostly for general sales taxes and cigarette taxes, and 12 states have proposed personal income tax decreases, according to the report.
Fiscal 2016 budgets assume state funds for Medicaid will increase by 3.1% and federal funds will increase by 6.9%, NASBO said. That's less than the 5.2% increase in state funds and the 24.2% increase in federal funds estimated for 2015, the first full fiscal year state Medicaid program could expand under the Affordable Care Act.
Budget gaps increased slightly in fiscal 2015 but were well below the levels seen during and immediately after the Great Recession, NASBO said.
Total balances, which include ending balances and the amounts in states' rainy day funds and reserves, amounted to $71.2 billion or 9.9% of general fund expenditures in fiscal 2014 — a slight decline from the year before. Total balances are estimated to decline in FY-2015 to $60.3 billion or 8.0% of expenditures, and most of that decline is due to Alaska drawing down its reserves in response to declining oil prices. For fiscal 2016, governors recommended decreasing total balances to $55.2 billion or 7.1% of general fund expenditures, NASBO said.
