New Reports on State, City Fiscal Conditions

Commentary

New Reports on State, City Fiscal Conditions

Reports show states continuing slow fiscal recovery, many cities still under pressure

Two recent reports by the National Association of State Budget Officers (NASBO) and the Pew Charitable Trusts, respectively, offer the latest evidence that the post-recession fiscal situation at the state and local levels remains in a virtual holding pattern, with states seeing a continuing slow recovery and many cities still under pressure.

States are expected to see moderate fiscal improvement in 2015, continuing the trend of slow, but sustained, recovery in recent years in the wake of the Great Recession, according to the NASBO’s latest Fiscal Survey of the States report. Among its findings:

  • After dipping for several years, state general fund spending surpassed pre-recession highs for the first time in fiscal year (FY) 2013 and is expected to end FY 2015 at a level 9.4 percent higher than the pre-recession peak (not adjusted for inflation).
  • Forty-three states have enacted higher general fund spending levels in FY 2015, with aggregate general fund spending rising to a level of $751.6 billion, a $22.7 billion (or 3.1 percent) increase over FY 2014 levels. This is a smaller increase than the 4.9 percent spending growth seen in FY 2014.
  • Overall state spending levels are also expected to rise in FY 2015, but at a slower pace than the historical average.
  • Education and health care are seeing significant spending increases this year. In FY 2015, 39 states increased general fund spending for K-12 education by $11.1 billion, 36 states increased Medicaid spending by a net $8.5 billion, and 40 states increased higher education spending by a net $4.4 billion. Further, 35 states increased corrections spending, and 12 states enacted transportation spending increases.
  • All areas of the budget are seeing aggregate spending increases in FY 2015 except public assistance, where 12 states have made general fund budget cuts yielding a net decrease of $590 million.
  • State general fund revenues are projected to increase in most states, increasing by 3.1 percent to $748.3 billion in FY 2015, an increase over the 1.3 percent gain the previous year.
  • A total of seven states have made $852 million in mid-year budget cuts thus far, a decline relative to the previous two years.
  • A total of 21 states cut taxes in FY 2015 by an estimated $2.3 billion, slightly higher than the $2.1 billion in tax cuts enacted the previous fiscal year. Only ten states increased taxes in FY 2015.
  • Ending account balances and the amounts in budget stabilization (e.g., “rainy day”) funds are expected to fall a second straight year from their post-recession high of $70.6 billion in FY 2013, representing 10.5 percent of general fund expenditures that fiscal year. Balances will decrease in FY 2015 to $53.1 billion (7.3 percent of general fund expenditures) down from their FY 2014 level of $62.7 billion (8.9 percent of general fund expenditures). However, the two states with the largest reserves-Texas and Alaska-account for over 38 percent of total state balance levels in FY 2015, and balances in the remaining 48 states are only projected to average 4.8 percent of general fund expenditures.

Despite the slowly improving fiscal health, the report suggests that states will continue to face difficult spending decisions in areas like Medicaid and higher education, in which growing costs are outpacing inflation and state revenue growth. Overall, the NASBO report concludes that “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.”

The fiscal situation at the municipal level remains more difficult, according to a November 2014 Pew Charitable Trusts report that reviewed data from 30 major U.S. cities and found that 18 saw revenues decline from 2011 to 2012 after adjusting for inflation. The report cites continuing declines in property tax revenue and cuts to state and federal aid to cities as major fiscal challenges. Among the report’s findings:

  • The 18 cities with revenue declines between 2011 and 2012 was double the number seeing declines between 2010 to 2011, and eight of those cities recorded their lowest revenues since the start of the recession in 2012. By contrast, 10 of the 30 cities were seeing revenue levels exceeding their pre-recession peaks.
  • Across all 30 cities reviewed, both property tax revenues and state and federal aid fell an average of four percent.
  • A total of 17 cities increased spending on some programs and services, but overall spending in most cities remained below pre-recession levels, suggesting “that many city officials have adjusted to the reality of an unusually slow recovery.”

While the analysis reviewed data from 2012, the report notes that, “the effects of the Great Recession are still being felt in some cities as of 2014,” emphasizing the lingering challenges that municipal governments face years after the beginning of the national post-recession recovery.

Taken together, these two reports are consistent with several others that suggest that policymakers at both the state and local levels will need to remain frugal amid a sluggish economic recovery and continue to pursue government streamlining opportunities and innovative reforms to deliver better value for taxpayer money.

Leonard Gilroy is director of government reform at Reason Foundation and is the editor of the Privatization & Government Reform Newsletter, available here. This article was featured in the December 2014 edition of the newsletter.

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.