WASHINGTON — States are experiencing modest revenue growth, leading governors to propose average spending increases of 3.2% in the coming fiscal year, the National Association of State Budget Officers found in a newly released report.

“State fiscal conditions are showing signs of improvement compared to this time last year,” NASBO Executive Director John Hicks told reporters in a conference call Wednesday. “General fund revenue growth has accelerated in fiscal 2018 and most states are seeing tax collections come in at or above budget projections.”

Thirty-nine states reported meeting or exceeding their fiscal 2018 revenue projections compared to only 17 in 2017, according to NASBO’s spring edition of its Fiscal Survey of the States, which is published twice a year.

John Hicks, executive director of the National Association of State Budget Officers
John Hicks, executive director of the National Association of State Budget Officers Brian Tumulty, The Bond Buyer

The survey estimated that state revenues will grow at an average of 4.9% in 2018, with larger states showing the biggest gains.

Only nine states reported making midyear budget cuts totaling $830 million this year compared to 22 states that cut $3.5 billion in 2017.

Hicks cautioned that budget conditions vary by state and that all states face long-term challenges addressing the costs of healthcare, employee pensions, K-12 education and infrastructure.

Many states are finalizing their 2019 budgets. Forty-six of them have fiscal years that start on July 1. New York began fiscal 2019 on April 1 while Texas will begin it on Sept. 1 and the two remaining states — Alabama and Michigan — will begin theirs on Oct. 1.

Hicks said governors have proposed a total of $26.5 billion in spending increases in fiscal 2019 compared to only $8.7 billion a year ago.

The biggest part of the proposed increase — $7.2 billion — will go for K-12 education programs followed by Medicaid with $5.3 billion.

K-12 education programs average about 35% of spending by the states, representing the biggest spending category in most of them.

Connecticut and California budget officials who joined Hicks on the call with reporters said their states are among the many experiencing improved budget conditions.

Connecticut has a rainy-day reserve fund that’s equal to only 1% of its general fund but that is expected to improve significantly this year and next, said Paul Potamianos, the state's executive budget officer.

The state will use a volatility cap this year to add about half a billion dollars to its rainy-day fund. By the end fiscal 2019 Connecticut expects the reserve will increase to about $1.1 billion, or roughly 6% of its budget.

“That’s a place I’d like to be as a budget director, having a little bit of a net under the tightrope, because at some point a recession’s going to come and budget reserve funds are a very important tool for managing budget volatility,” said Potamianos.

California is making a special contribution to its rainy-day fund this year that will increase it to about10% of state revenues, in addition to creating two other reserve funds.

“From a revenue perspective, things are looking very strong in California,” said Michael Cohen, director of the California Department of Finance. “We are attributing much of that to the expectation that the federal tax bill is leading to some temporary stimulus to the national economy. However, we are concerned about the long-term trend on revenues given that, in essence, the federal government is borrowing from the future.”

Nationwide, the median rainy-day balance is projected to be 6.2% of state spending in 2019 compared to only 1.9% in fiscal 2011 in the wake of the Great Recession.

“Most states continued to strengthen their rainy-day fund reserves,” Hicks said. “In recent years this has been a gubernatorial priority in particular.”

Personal income taxes, which represent 45% of state revenues, are projected to grow by a median of 4.2%.

Sales and use tax collections, which represent about 31% of overall state revenues, are forecast to grow 3.5% in 2019. Among the states experiencing higher sales tax revenue are 15 where Amazon began collecting sales tax on remote sales in the 2017 calendar year, Hick said.

Those 15 states are Hawaii, Idaho, Iowa, Louisiana, Maine, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, Rhode Island, South Dakota, Utah, Vermont and Wyoming.

Taxing methods vary by state. Five states don’t collect state sales tax and seven states don’t have income taxes.

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