WASHINGTON - Governors presented more optimistic outlooks of their states' economies and finances in their state of the state addresses this year, and many said they would pursue new spending, Moody's Investors Service said in a report released Friday.
Frequently mentioned topics in the addresses included increasing education funding and improving educational outcomes, investment in infrastructure and reducing taxes. Additionally, there were fewer mentions of reducing debt levels, reforming pensions and creating new revenue streams in governors' speeches than there had been in recent years, the rating agency said.
The governors' remarks reflect improving credit conditions and expectations of healthier revenue growth, and they signal greater political pressure on states to spend more after years of austerity and low capital investments, Moody's said.
In the 37 addresses Moody's analyzed as of Feb. 6, the most common theme was education. Twenty-eight governors recommending increasing funding for K-12 and higher education or improving school performance. "The high reoccurrence of this theme suggests that, after years of cutting education spending, most governors expect to have sufficient revenue growth to support higher levels of education spending," Moody's said.
Governors in some states recommended funding that would increase education spending significantly, and it is likely that budget requests will far outpace the 1.3% average annual growth in state aggregate education spending over the past five years, the rating agency said.
However, a large increase in education funding could pressure state budgets if the strong revenue growth seen in fiscal 2013 isn't sustained through fiscal 2015. In states where governors proposed education reforms without specific funding plans, local governments may have to contribute funding, and future revenue shortfalls could hurt both state and local governments' budgets, Moody's said.
The need for infrastructure investment was mentioned by 17 governors in their state of the states.
"The popularity of this state of the state theme suggests that governors expect to have additional capacity to afford infrastructure investment and borrowing in the coming years," Moody's said. Many states have had borrowing constraints in recent years because they have policies that cap debt at a percentage of personal income or revenue, so as state continue to see revenue and economic growth, states will have more flexibility to invest in infrastructure.
A recent trend among states is to finance infrastructure through public-private partnerships while trying to maintain lower debt levels, and this trend was continued in the state of the state address in Colorado, Moody's said.
Sixteen governors mentioned tax reform in their addresses. "The growing attention to tax reform, which typically includes a reduction in tax rates, reflects the recent growth in anti-tax sentiment and expectations that revenue growth will be around to help balance foregone revenues," the rating agency said. Additionally, tax reform tends to become a more popular topic in election years.
Governors brought up tax reform in several different ways, with some interested in reducing income tax rates and others citing more focused rate reductions or tax credits. But while rate reductions are more affordable now for many states because revenues are rising, it would be harder for states' to balance their budgets if revenues under perform expectations in later downturns, Moody's said. Some proposed tax reform could also affect local governments' revenues, putting their budgets at risk, it said.
