Survey: State budgets facing 'big squeeze'

Slow economy, expiration of federal stimulus funds cited as challenges

An early morning view of the Capitol in Des Moines, Iowa, Friday, March 26, 2010. (Steve Pope/Gazette Photo)
An early morning view of the Capitol in Des Moines, Iowa, Friday, March 26, 2010. (Steve Pope/Gazette Photo)

While the overall fiscal condition of U.S. states has improved from the depths of the national recession, results of a new national survey issued Tuesday suggested states are facing a ‘big squeeze’ from both local and federal governments.

The combination of the effects of the economic downturn, tepid economic growth, and the expiration of federal stimulus and other program funding from Washington has severely impeded the growth of state resources, according to the fall 2011 fiscal survey of states conducted by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO).

Additionally, spending on Medicaid is expected to consume a larger share of state budgets and grow much more rapidly than estimated state revenue growth, resulting in slow or no growth in education, transportation or public safety, the survey indicated.

“All in all, it’s not a great outlook, Dan Crippen, NGA executive director, told reporters during a teleconference to discuss the survey results.

“State governments are feeling the squeeze from the demands for spending from both local and federal governments,” he added. “Revenues are up slightly, but they do not yet meet 2008 levels, and the reduction of federal funds compounds the fiscal challenges for states.”

In Iowa, Gov. Terry Branstad and the split-control Legislature spent a contentious 2011 session battling over a new state budget that pared back general fund spending to about $6 billion for the current fiscal year that began July 1.

The state Revenue Estimating Conference projects the state will collect about $235 million more in state tax collections for the coming budget year, but is slated to revisit its 3.9 percent growth estimate at a Dec. 15 meeting. The governor and Iowa lawmakers are not facing a large projected deficit like past years, although the nonpartisan Legislative Services Agency estimates a $115.6 million gap between available revenue and spending commitments already made for the 2013 fiscal year that begins next July 1.

Next fiscal year’s budget projections from LSA experts include nearly $296 million in built-in and anticipated increases that will top the $6.397 billion spending limitation threshold if the Legislature and Branstad restore state appropriations at the current funding levels without making adjustments.

The fiscal 2013 projections include a previously enacted 2 percent increase in base K-12 education funding, a $102 million jump in anticipated Medicaid costs, $102.6 million to cover salary hikes for state employees covered by collective bargaining contracts, $30 million for mental health allowed growth, $19.1 million to staff additional community-based corrections and prison beds, and other commitments, according to the LSA budget analysis.

Overall, state 2012 enacted budgets include nearly $667 billion in general fund expenditures, a 2.9 percent increase compared to $648 billion in general fund spending in 2011, the report indicated. Despite the second year with an increase, total enacted general fund spending in 2012 is still $21 billion less than the pre-recession high of $687 billion in 2008, said NASBO Executive Director Scott Pattison.

At the same time, local government revenues have been severely impacted by the decline in housing values, he noted. Many local governments, including school districts, rely heavily on property taxes to support their activities and these jurisdictions have been pressing states for more local assistance, he added.

“This report shows that state budgets are certainly improving, however growth is weak and there is not enough money for all of the bills coming in,” Pattison said. “State officials will still be cutting some programs and increases in funding for any program except for health care will be rare.”

The NASBO leader had expected to see a “turning point” for state finances in the latest report, but Pattison said the data suggests state governments are “recovering but not recovered” and continued budget pressures now likely mean pre-recession revenue levels won’t be achieved until fiscal years 2014 or 2015. A total of 17 states report funding gaps totaling about $40 billion in aggregate shortfalls heading into the fiscal 2013 budgeting cycle, he added.

“We have growth, but it’s slow, tepid growth,” Pattison said.Although state general fund revenues increased in both 2011 and 2012, the dramatic declines in revenue collections experienced in 2009 and 2010 left total general fund revenues in the current fiscal year about $21 billion below their 2008 levels. Specifically, revenue collections in 2012 reflect a 5.2 percent increase in personal income tax revenue but a 0.1 percent decrease in corporate income tax revenue and a 0.3 percent decrease in sales tax revenue (in part because of the end of temporary sales increases in a few states).