Fiscal condition of state governments has improved

State governments are benefiting from an improved fiscal environment as they work to finalize their fiscal 2020 budgets, with governors in 19 states proposing general fund spending increases of more than 5%, according to a new report.

The Spring Fiscal Survey of the States by the National Association of State Budget Officers released Thursday found that rainy days funds are expected to reach a record level of 8.6% of overall expenditures by the states, with the median level at 7.5%.

This means state governments generally are better prepared for an economic downtown than at any other time since NASBO began keeping records in 1988.

When the Great Recession began in December 2007, rainy day reserves among the states were roughly half as much, averaging 4.8% of expenditures in the 2008 fiscal year.

State revenues dropped an average of 11% between the Great Recession years of fiscal 2009 and 2010.

Overall rainy day fund balances are expected to reach $74.7 billion in fiscal 2020.

Hick, John Hicks NASBO

On another positive note, an increasing number of states are analyzing the volatility of their revenue stream as part of their rainy day fund analysis. Some states, for instance, have revenues tied closely to the boom-and-bust cycles of the oil and gas industry.

“Most states entered fiscal 2019, the year we are in, in a strong fiscal position and most states are meeting or exceeding their revenue projections for the current year,” NASBO Executive Director John Hicks told reporters in a conference call Wednesday.

Additionally, none of the 50 states reported making a mid-year budget reduction due to a revenue shortfall during the current fiscal year.

Estimated annual spending growth for fiscal 2019 came in at 5.8%, significantly higher than the 4.3% growth rate NASBO reported about six months ago in its Fall 2018 Fiscal Survey of States. It also was the fastest rate of spending growth in the last decade.

The new survey found proposed spending plans would increase general fund expenditures by 3.7% in fiscal 2020, with 47 states proposing spending increases. Most states will begin their 2020 fiscal year July 1.

Governors have requested that 58% of all 2020 spending increases go toward either K through 12 education or higher education.

General fund spending by the states is expected to total $915.9 billion in 2020, which is above pre-recession levels for the first time on an inflation adjusted basis.

However, 25 states remained below their pre-recession spending levels in fiscal 2019 on an inflation adjusted basis, which highlights how long it has taken many of the states to fully recover from the Great Recession.

Hicks said Medicaid’s share of the new spending is a “relatively small” 9% compared to previous years with an overall increase of $2.7 billion.

“That can be attributed in part to a strong economy, low unemployment and an expected flattening of Medicaid enrollment,” Hicks said.

Meanwhile, Maine and Virginia expanded Medicaid eligibility in 2019.

On the tax side, 21 governors proposed net tax and fee increases totaling $8.9 billion for fiscal 2020, while 11 governors proposed mostly modest decreases totaling $700 million.

The largest source of new revenue would be $2.6 billion from motor fuel increases proposed in five states.

Seven governors recommended corporate income tax increases while three proposed reductions which would produce an overall increase of $1.1 billion in new revenue.

Eight governors recommended sales and use tax increases and five recommended decreases, resulting in a net increase of $823 million.

Twelve governors recommended tax increases on cigarettes and tobacco products, while one governor proposed a small decrease with a net result nationwide of $268 million new tax revenue.

Nine states also are considering or have considered taxes on e-cigarettes or vaping products.

Two governors proposed increases to gaming taxes or lottery revenues that would increase revenue by $341 million.

Two other governors proposed modest increases to alcoholic beverage taxes that would produce $28.2 million.

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