Federal stimulus money is keeping states spending even as most sources of revenue dry up.
In its annual report on state expenditures, the National Association of State Budget Officers estimated states spent $1.593 trillion in fiscal 2009, which for most states ended June 30.
That represents a 6% increase from the $1.5 trillion in expenditures in fiscal 2008 and an 11.8% leap from fiscal 2007.
The acceleration in expenditures bucks a severe recession and its attendant squeeze on tax revenue.
Since the recession began in December 2007, economic output has shrunk nearly 3%, according to the Bureau of Economic Analysis.
The slowdown has choked both salaries and sales, with a devastating hit to state budgets. States derive nearly two-thirds of their tax revenue from personal income and sales taxes, according to the Census Bureau.
Total tax revenues shrank 8.2% to $712.5 billion in the 12 months ended June 30, according to the Census Bureau.
The plunge in income taxes was particularly nasty, at 13.6%.
Michigan suffered a free-fall of more than 20% in tax receipts, with California and Florida also taking big hits.
In its semiannual Fiscal Survey of States, NASBO said it expects tax collections to suffer possibly as late as fiscal 2012.
"States are currently facing one of the worst, if not the worst, fiscal periods since the Great Depression," NASBO said.
States will have faced $256 billion in budget gaps between fiscal 2009 and fiscal 2011, according to the group.
With most states required to balance their budgets, one might expect states to spend less. That is exactly what the federal government hoped to avoid.
With the passage of the American Recovery and Reinvestment Act in February, the federal government funneled nearly $135 billion in flexible emergency funding to states.
Without that money, states would be spending less, NASBO said.
Spending financed by general state funds sank 3.2% in fiscal 2009 to $664.4 billion, according to NASBO.
State spending financed by federal funds skyrocketed 21.2% to $478.37 billion.
Federal money now finances 30% of state expenditures, compared with 26.3% in fiscal 2008.
"The passage of ARRA created a large influx of federal dollars to the states and produced a shift in the funding sources for state expenditures," NASBO said.
Federal funding increased in every category, including education, public assistance, prisons and criminal justice, and transportation. States' biggest use of federal money is Medicaid.
Medicaid and K-12 education remain states' biggest costs. Combined they represent more than 40% of state spending.
States spent $335.7 billion on elementary and secondary education in fiscal 2009, NASBO estimated, an increase of 3.6%.
State spending on Medicaid spiked 7.8% in fiscal 2009 to $335.2 billion. Federal dollars contributed all of this increase. The stimulus legislation provided for $87 billion in Medicaid funding for states. The federal government now finances almost 60% of state Medicaid expenditures.
Nearly every state has targeted Medicaid for spending cuts, in many cases by freezing or slashing the reimbursement the government pays providers.
Spending on transportation swelled 10% to $130.45 billion, and much of that was also financed with federal money. Federal funding for state transportation programs jumped 21%.
The type of state spending that is perhaps of greatest interest to municipal bond investors — capital spending — resumed its growth after a hiccup in fiscal 2008.
States in 2008 cut spending on long-term capital projects for the first time in five years. The decline was short-lived, NASBO said. Capital spending rocketed 15.9% to $94.5 billion in fiscal 2009, buttressed from a number of angles.
First, federal funding for capital projects surged 34%. Second, ARRA contained a number of provisions, most prominently the Build America Bonds program, that enabled issuers to tap the bond market for cheaper sources of financing for capital projects
Bond proceeds contribute 31.6% of state capital project financing, the highest share of any state spending category.
More than 70% of the $43.56 billion states raised from bond sales in fiscal 2009 were allocated to capital projects. The biggest overall spending hikes came in Wyoming, Nebraska, and Mississippi, which all increased expenditures 20% or more.
Five states cut spending, with Nevada tightening the most.
