State government finances continued to improve in 2012, stabilizing further amid a slow recovery from the 2008 recession that dampened tax receipts and threw many state budgets out of balance. Aggregate budget deficits were at their lowest levels since 2009, and overall state revenues are projected to exceed their 2008 levels for the first time since the recession began, in nominal terms. However, the state economic recovery remains uneven, and states are facing ongoing fiscal pressures that include rising Medicaid and public employee pension and healthcare costs, federal fiscal and debt reduction policies that could reduce outlays to states, and political pressures to increase spending on education and other local priorities.
The National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) issued their biannual state fiscal survey in December 2012, noting improving state fiscal conditions relative to those experienced in 2009 and 2010 in the wake of the recession.1 Among the findings in the NGA/NASBO survey:
- FY 2013 general fund expenditures ($681.3 billion) increased 2.2 percent from FY 2012 ($666.9 billion), a spending level $6 billion less than the $687.3 billion peak seen in FY 2008. A total of 42 states enacted FY 2013 budgets that increased spending over FY 2012 levels, and at least half the states increased spending on K-12 education, Medicaid, corrections and/or higher education. Nonetheless, a total of 24 states enacted FY 2013 budgets with lower overall nominal general fund expenditures than in FY 2008.
- The report projects that aggregate general fund revenue will top $692 billion in FY 2013, a 3.9 percent increase over FY 2012 and a level that exceeds pre-recession highs for the first time post-2008 in nominal terms (though it remains 7.9 percent below the FY 2008 level when adjusted for inflation). A total of 43 states enacted FY 2013 budgets with greater general fund revenues than in FY 2012. A total of 20 states decreased taxes, while 11 enacted net tax and fee increases.
- In FY 2012, general fund revenues from all sources (e.g., sales taxes, personal income taxes, corporate income taxes, fees, etc.) surpassed original forecasts in 34 states, were on target in five states and below forecasts in 10 states. General fund revenues are projected to increase $26.1 billion in FY 2013, in part attributable to recent tax increases approved by California voters in November 2012. A total of 21 states enacted budgets estimating lower nominal general fund revenues in FY 2013 than in FY 2008, before the recession.
- Ending account balances and the amounts in budget stabilization (e.g., “rainy day”) funds are rising as policymakers continue to build back depleted reserves, but they still remain far short of their FY 2006 peak of $69 billion, or 11.5 percent of general fund expenditures. Balances increased in FY 2012 to $50.9 billion (7.6 percent of general fund expenditures) over their FY 2010 level of $31.5 billion (5.2 percent of general fund expenditures). Balance levels are projected to increase to $61.3 billion in FY 2013, or 9.0 percent of general fund expenditures.
- However, the two states with the largest reserves—Texas and Alaska—account for over 48 percent of total state balance levels in FY 2013, and balances in the remaining 48 states are only projected to average 5.0 percent of general fund expenditures in FY 2013.
Looking ahead, the report suggests that despite improving fiscal conditions, "states are still faced with recession-induced challenges and looming long-term issues that will continue to have implications for operating budgets."2
The National Conference of State Legislatures’ (NCSL) State Budget Update: Fall 2012—part of an ongoing reporting series that surveys legislative fiscal directors on their states’ fiscal situations—struck a similar tone, finding that state budgets are continuing their slow recovery and reporting that most legislative fiscal officers describe their state’s finances as "stable."3 While state revenues are projected to increase in FY 2013 to peak or near-peak levels in many states, the NCSL report suggests that the overall state recovery has been uneven and that states continue to face significant challenges—including federal deficit reduction actions, increasing pressures on state program funding, international debt crises, and the impact from recent storms—with "enough uncertainty [lingering] on the horizon to create a fragile situation for state budgets."4 Additional findings from the NCSL report include:
- Legislative fiscal directors in 33 states and the District of Columbia reported that revenues are stable and likely to meet FY 2013 revenue estimates, and officials in an additional six states are optimistic about their revenue outlook for the remainder of FY 2013. However, officials in four states (Alaska, Maine, New Jersey and New York) are pessimistic about meeting FY 2013 revenue projections—compared to zero the previous fiscal year—and officials in seven additional states indicated that they are concerned about their FY 2013 revenue outlook.
- NCSL reports that more states face spending overruns in FY 2013 than in the previous fiscal year, with 18 states reporting at least one major spending category—education and Medicaid being the most prominent—significantly over budget in FY 2013, up from 11 states in FY 2012.
- NCSL finds that 25 states will return to pre-recession peak revenue collections by the end of FY 2013 (at least in nominal, not inflation-adjusted, terms), though peak collections in the other half of states are not projected until FY 2014 or later.
Neither the NGA/NASBO nor NCSL reports quantified actual or projected state budget deficits for FY 2013, but according to data compiled by the Center on Budget and Policy Priorities (see Figure 1), a total of 31 states closed $55 billion in budget deficits for FY 2013, a significant sum but one that is down significantly relative to deficits closed in the last several years (totaling $548 billion in aggregate between FY 2009 and FY 2012).5
Lastly, the State Budget Crisis Task Force, created by former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Board Chairman Paul Volcker to assess the long-term fiscal sustainability of the states and the persistent structural imbalance in state budgets, issued a report in July 2012 identifying six major fiscal threats states continue to face in the coming years:6
- The growth in Medicaid spending, which in recent years has surpassed K-12 education spending as the largest expenditure in state budgets, is increasingly crowding out other spending priorities.
- Given that 20–50 percent of state revenues come from federal outlays in any given state, actions taken to reduce the national deficit and debt could potentially impact state budgets.
- State and local public employee pension systems are underfunded by $1–3 trillion, according to various estimates, creating significant risks for future state budgets. Additionally, state and local government retiree healthcare benefits are underfunded by over $1 trillion, compounding the risks to state finances.
- Volatile state tax revenues and eroding tax bases threaten to undermine state finances.
- Local governments, which have seen year-over-year declines in property tax revenue since the 2008 recession, are experiencing prolonged fiscal stresses that could challenge state government finances.
- The over-reliance on cash-basis budgeting (which enables budget gimmickry) and the lack of multi-year financial and capital planning linked to the annual budget process in many states masks structural budget imbalances and hinders state fiscal stability.
Overall, states are slowly recovering from the impact of the 2008 recession, but with the "new normal" of slow economic growth and a variety of looming fiscal threats, the states' fiscal situation might best be described as precarious in the near term.
2 Ibid, p. vii.
3 National Conference of State Legislatures, State Budget Update: Fall 2012, December 2012, p. 1.