The Outlook for 2012 State Budgets

The National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) released their Spring 2011 Fiscal Survey of the States yesterday. The Survey provides aggregate and individual state data on general fund revenues, expenditures and balances. As such it serves as a good barometer of the fiscal health of state governments and highlights existing and future trends in state budgeting.

The study shows mixed trends for states given that  their revenues generally lag behind national economic recoveries. The Fiscal Survey argues that

states face numerous fiscal challenges as they enter fiscal 2012 including the withdrawal of significant funding that was provided through the American Recovery and Reinvestment Act of 2009 (ARRA). As unemployment remains elevated and consumer spending remains soft, state revenue collections continue to be affected by the economic downturn while at the same time pressure for state spending in areas such as healthcare and education con­tinues to grow.

After declines in 2009 and 2010, revenues and expenditures increased in 2011 and will again in 2012 (see chart below).

The upturn means that 40 states will have higher general fund budgets in fiscal 2012 than in the previous year. Even with this improvement, aggregate spending among all states and 29 individual states is still below 2008 levels.

Many states face continued shortfalls in revenue. The study states that

for fiscal 2011, 22 states are exceeding original forecasts, while 11 are on target, and 17 states are below forecasts. This suggests that some states could finish fiscal 2011 with slight surpluses. While any surplus is a positive sign, such surpluses are more likely the result of cuts in spend­ing from previous fiscal years as well as conservative revenue forecasts.

While the Fiscal Survey does not discuss how these surpluses may be used, the politics surrounding lowering taxes or restoring funding to programs that have been cut has the potential for partisan conflict (see the current situation in Pennsylvania).

The future does not look good either:

Although not all state budget offices have completed forecasts, thus far 33 states are reporting $75.1 billion in budget gaps for fiscal 2012 and 21 states are reporting $61.8 billion in budget gaps for fiscal 2013.

Twelve states are proposing net tax increases to help solve the budget gaps, which is down from 24 in fiscal year 2011. As indicated by the figure below, this follows the historical trend of tax increases in the immediate aftermath of a recession.

Seventeen states are proposing across the board cuts to balance their 2012 budgets, while 38 states are looking at targeted budget cuts with higher education, K-12 education, and public assistance at the top of the list of policies with declining expenditures. Other strategies to breach the budget gaps include agency reorganization (22 states), local aid reductions (18 states), cuts to state employee benefits (17 states) and layoffs (15 states).

Overall the Spring 2011 Fiscal Survey of the States shows improved trends from the depths of the recent recession. Many states still face difficult budget problems in the coming years. However, the historical data provided by the Fiscal Survey shows that states should be in a better fiscal state in the years to come.

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