States Inch Closer to 2008 Budget Levels

A new report shows state revenue and spending still hasn't returned to pre-recession levels. But it's getting close.
by | November 30, 2011

State budgets continue to suffer the effects of the economic downturn that began four years ago, and their finances still haven’t returned to pre-recession levels, according to a new study released by groups representing state leaders.

The report, which analyzes states' FY 2012 general fund budgets, which took effect this summer, offers some hope: state revenue and spending are both higher than they were a year ago, even though they haven't returned to their FY 2008 levels.

But states may be facing a case of bad timing: just as their financial situation may poised to turn a corner, the federal government could soon unleash a slew of budget cuts that could have serious impacts on states next fiscal year.

Of particular concern to state leaders is the rising cost of Medicaid which is the single largest portion of state spending, representing 23.6 percent of their expenditures. In FY 2011, which ended this summer, states spent $398.6 billion on Medicaid, up 10.1 percent from the prior year.

Those soaring costs are a combination of the rising price of health care in this country and heightened demand on the program as a result of the economic downturn. The cost of Medicaid continues to climb, despite nearly every state taking steps to reign in those costs such as restricting payment rates to providers, eliminating coverage for services like dental care and increasing co-pays, according to the report.

Meanwhile, the program’s expense is increasing so quickly it threatens to crowd out other areas of state government spending. This year, states are collectively increasing Medicaid spending by $19.4 billion while decreasing higher education spending by $3.2 billion. The authors of the report say Medicaid costs are rising so quickly that they also threaten future investments in transportation and public safety, in addition to education.

Part of the Medicaid expense is being driven by end of stimulus funding that states got in 2009 to help plug their budget holes and handle the increased Medicaid demand. This year, stimulus funding for states is essentially gone, totaling just $3 billion. States enjoyed $61.1 billion of stimulus money in 2010 and $50.3 billion in 2011.

Much of that money was accepted on the condition that states would use it to continue their Medicaid programs without reducing eligibility. Today, states are still bound by those obligations, known as maintenance-of-effort requirements, even though the federal aid to pay for them has expired.

Overall, the report found that states’ 2012 budgets call for $666.6 billion of expenditures and $659.4 billion of revenues. Both figures are about 3 percent below their 2008 levels. The fiscal year, which began in July, forced state budget officers and lawmakers to make difficult decisions, as 39 states had to close a collective $95 billion in budget gaps due to the disconnect between their revenue and spending needs.

NASBO Executive Director Scott Pattison said in an interview Tuesday that if the country doesn’t sink into a double-dip recession, states will likely see both measures return to pre-recession levels in the 2013 fiscal year. “The trends in this report show that if the economy continues to improve, state finances will stay on a positive, albeit slow-moving, track,” Pattison says.

Still, all states won’t be in the clear: already, 17 are reporting $40 billion in projected budget gaps for the 2013 fiscal year, which doesn’t start for seven months.

Interestingly, despite the harsh economic climate, states’ are increasingly building up their reserves, which were decimated during the recession. After peaking at $69 billion in 2006, they bottomed out at $30.6 billion, but this year they're projected to increase to $41.2 billion. That money is often used as a cushion to protect against cuts, and if a double-dip does happen, it may help states through difficult times. But the report notes that reserves aren't as robust as they appear, since most their growth is due to Texas and Alaska accounting for almost $19 billion. All total, 15 states are expected to grow their reserves this year.

States are also taking steps to limit their own revenue, which some critics say has made some cuts much worse than they really need to be. This year, states enacted $2.6 billion in net revenue decreases along with a net decrease of $584.1 million in taxes and fees.

Advocates such as the Center on Budget and Policy Priorities say those actions are only exacerbating states' revenue problems and contributing to budget gaps.

Pattison notes that much of the net tax decrease this year is largely due to policies of just two states, North Carolina and California. A total of 18 states enacted net tax decreases this year, most of which was due to the expiration of temporary taxes created in the beginning of the recent recession. This year marks the first time since 2007 that states haven't had a net tax increase.

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