“Certainly the state situation has been this new-normal, below-average growth and, again, if it continues for another two or three fiscal years then we have to assume we’re in this new economic era,” says Scott Pattison, executive director of the National Association of State Budget Officers, which issued the budget survey.
The forecast among states is generally moderate. States have escaped the worst of the recession and their budgets are healing. But strong demands on spending still remain, as higher education and health care costs outpace inflation. Revenues and spending are up, but they’re largely dedicated to those two categories.
“Overall, states are in a better position than they were a few years ago, but as the economy continues along a trajectory of slow growth, fiscal challenges are likely to persist from rising spending demands and limited gains in revenue collections,” NASBO finds in the report.
Education and health care are driving the spending increases
The spending increases planned for the current fiscal year are concentrated on K-12 spending, which will see an $11 billion boost. Medicaid is next with an additional $8.5 billion dedicated to the program. Spending has grown for all of a handful of budget categories, save one: public assistance has seen spending this fiscal year decline by $590 million.
All told, 39 states are spending more on K-12 education and 36 are spending more on Medicaid. Six states cut K-12 spending and seven enacted cuts to Medicaid.
Revenue is up, but not in real terms
The $23 billion increase in spending is matched by a virtually similar rise in revenues, which are projected to reach $748 billion this fiscal year. (All but six states expect revenue growth this fiscal year.) But while revenues have steadily grown since the recession, they still haven’t recovered to their pre-recession peak, when inflation is accounted for.
“If you adjust for inflation, states are not back to where they were,” says Pattison. “They’re about 2 percent below the pre-recession peak of revenues.” Revenues would have to be about $15 billion higher—$763 billion—in order to reach pre-recession levels. “So, again, stability, growth, but really kind of a lackluster picture,” he says.
With gains in revenue limited and new spending largely directed at education and health care, states will likely continue to face tough budget decisions this fiscal year, the report concludes.
* Fiscal 2015 began on July 1 in 46 states. The fiscal year for Alabama and Michigan runs from October to September. New York’s is April to March and Texas’s is September to August. Twenty states operate on a biennial budget cycle.