States seeing moderate financial improvements

State governments are seeing their financial situations improve moderately, but two national experts warned Thursday the fiscal progress could be short lived in the face of some formidable economic challenges.

After several years of slow recovery, states are beginning to see some fiscal relief, said Scott Pattison, executive director of the National Association of State Budget Officers, whose organization released The Fiscal Survey of States report Thursday with the National Governors Association.

However, unemployment rates remain high and the post-recession recovery remains weak at a time when challenges loom over declining federal funds for state programs subject to sequestration and continued spending demands in areas directly affected by the sluggish economy -- such as Medicaid, higher education and corrections, he noted.

“It's still a tough slog toward full recovery for states, although we are seeing moderate improvement,” said Pattison, who joined NGA Executive Director Dan Crippen on a teleconference call with reporters to discuss their updated fiscal view for U.S. states.

“State spending in fiscal 2013 is still below the fiscal 2008 pre-recession peak,” said Crippen. “Lower real-spending levels in fiscal 2013 compared to fiscal 2008 indicate that state budgets are not growing fast enough to make up for recession-induced declines and inflation. Additionally, governors are aware that the federal spending cuts started by sequestration will only get worse.”

General fund expenditures for states in fiscal 2014 are projected to increase by 4.1 percent, while general fund revenues are projected to increase by 2.8 percent for that same period – both slower than previous and historical growth patterns.

Aggregate general fund spending by U.S. states in fiscal 2013 is estimated to increase by 4 percent over the $672 billion in general fund spending in fiscal 2012. Fiscal 2014 recommended general fund expenditures total $728 billion, a 4.1 percent increase over an estimated $699 billion in fiscal 2013, they said. Medicaid represents the single largest portion of total state spending, estimated to account for 23.9 percent of total spending in fiscal 2012.

Pattison said state revenue collections have outpaced projections so far in fiscal 2013, helping many states relieve some spending pressures.

States continue to experience strong gains in personal income tax collections, which are estimated to have increased by 6.2 percent in fiscal 2013 and are projected to increase by 3.7 percent in fiscal 2014, Crippen noted. However, some of the increase in state revenues in fiscal 2013 is likely because of a one-time gain for states as taxpayers shifted capital gains, dividends, and personal income to calendar year 2012 to avoid potentially higher federal taxes that were set to begin last Jan. 1.

In Iowa's case, personal income taxes paid by Iowans prior to the April 30 filing deadline rose by 33.1 percent – a $560.3 million pay in that helped the state post its first-ever billion-dollar month in May. Iowa taxpayers paid nearly $1.023 billion in state taxes last month, driving overall tax collections to a 9.7 percent growth rate through May that outpaced the 5.2 percent fiscal 2013 growth estimate.

Pattison said the jump in states' income tax collections was a “one-time bump” that likely will be followed by a drop off next year.

Crippen noted that sales tax collections have not rebounded as rapidly since the end of the recession, prompting him to urge Congress to approve a proposed Marketplace Fairness Act that he said would allow for the collection of taxes already owed to states for online sales.

While continuing to outpace retail sales as a whole, many online retail sales are not contributing to state sales tax revenues because in many instances the sales tax goes uncollected, he said. Annually, states fail to collect more than $23 billion from transactions conducted over the Internet or through catalogues, he added.

Also of concern, Crippen said, is a “fair bet” that federal funds going to states will continue to diminish with states likely to have to pick up more of the costs for transportation and other spending areas.