WASHINGTON — State revenue growth will not bounce back to pre-recession levels until 2013 or 2014, according to new data released Wednesday by the National Governors Association and the National Association of State Budget Officers.
State budgets will improve slightly this fiscal year but will continue to be dogged by financial stress made worse by the loss of federal stimulus funds, the groups said in a biennial report compiled from surveys of state officials.
Governments at the local and state level have weathered massive declines in tax revenues from all sources — sales, personal income, corporate income, and property — but recent reports like the one released by NGA and NASBO indicate the revenues are reviving.
However, tax revenues are unlikely to return to the growth that existed in the past two decades, Raymond Scheppach, executive director of NGA, said during a press conference on the report. They will grow around 3-4% annually instead of the 5-6% they grew each year before the recession, he said.
Several events could induce more state spending cuts, the groups said. These include the loss of American Recovery and Reinvestment Act emergency aid, which will start eating away at budgets in fiscal 2012. Flexible funds from ARRA totaling about $151 billion will start to disappear in June, and it is clear that state revenues will not be high enough to replace those federal funds, Scheppach said.
This impending loss “presents a very difficult situation” for the states, the report found.
Because of ARRA, the federal government’s share of state budgets was about 35% in fiscal 2010. That compares with a 26% federal share in fiscal 2008.
In addition, health care reform will have an unknown effect on state budgets, the groups said. Scheppach cited concerns that major provisions set to kick in by 2014 could be costly to states, due to Medicaid-eligible residents entering the system.
Meanwhile, the Dec. 31 sunset on Build America Bonds, the program authorized by ARRA that states have used to borrow at low rates, will be only “moderately important” in terms of state finances, Scheppach said, noting that only four or five states have used BABs extensively.
“I think [states] will continue to use debt” in spite of declining revenues and fiscal austerity efforts, said Scott Pattison, executive director of NASBO. “The issue they have to deal with is debt capacity, and how much they want to issue to keep their ratings or make them higher.”
Two additional measures of state financial health — general-fund spending and budget balances — showed some improvement, according to the 84-page report. But the gains are still far below pre-recession levels.
About 70% of states expect to spend more general funds than they did in fiscal 2010, which for most states ended June 30. Budgets for fiscal 2011 plan for $645 billion of general fund spending, an increase of 5.3% over fiscal 2010 but still $40 billion lower than in fiscal 2008.
States also continue to draw down their budget balances, which are expected to decrease slightly in fiscal 2011 to $6.2 billion, or 5.6% of general fund expenditures, after dropping sharply during the past couple of years from a 2006 peak of $69 billion, or 11.5% of general fund outlays.
Overall spending remains at the trillion-dollar level. According to NASBO data, states spent an estimated $1.6 trillion in fiscal 2010 from all sources, including bonds.
Strategies that states are using this year to replenish or repair budgets include debt restructuring in Massachusetts, Michigan and New Hampshire, and various cuts to agencies and public programs.
Last year, strategies included issuing lottery revenue bonds in Arizona, restructuring New Hampshire university system debt, and transferring money from the debt-service fund in Tennessee.
The recent election of Republican governors is unlikely to change how states will approach their budgets, according to Scheppach. Most gubernatorial candidates, including Democrats, campaigned on not raising taxes, he noted, adding that most budget-stabilizing measures from new governors will take the form of spending cuts.