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NASBO: State Spending to Increase for 6th Straight Year

In 2016, states are expected to continue the growth they've experienced since the Great Recession. But the new era of growth is a modest one.

Budget Forecast
Minnesota Budget Director Margaret Kelly gives a presentation on the state's budget forecast.
(AP/Jim Mone)
State spending will rise this year for the sixth straight year, but the increases continue to be moderate as states settle in to the slow-growth era, according to a new report.

States are expected to spend just over $790 billion from their general funds in fiscal 2016. That's up 4.1 percent over fiscal 2015, although it's a slightly smaller rate of increase than last year. The numbers are detailed in a report released Tuesday by the National Association of State Budget Officers (NASBO). After several years of turmoil during and after the 2008 recession, states have now seen more than half a decade of steady spending increases, representing an era of stability.

But the new era is a modest one. Spending growth these days is unlikely to hit the historic 5.5 percent average annual growth states saw before 2008. And according to NASBO, total spending in 2015 was still about 4 percent below inflation-adjusted spending in 2008.

Much as they did last year, education and Medicaid -- which account for nearly two-thirds of state spending -- are gobbling up most of the spending increases. A total of 41 states enacted spending increases for K-12 education, 35 increased higher education spending and 31 enacted increases for Medicaid.

The expansion of Medicaid, which would make more people eligible for government-subsidized health care under the Affordable Care Act, accounts for much of the increased Medicaid spending. Last year, for example, spending on Medicaid increased 15 percent. As states are looking ahead to when they will have to cover more of the program costs, they are looking for ways -- such as implementing managed-care models or focusing on health-care outcomes rather than just services -- to mitigate their costs.

Rhode Island Budget Officer Thomas Mullaney said his state has implemented some of those cost-saving measures. But Medicaid costs have historically outpaced state revenue growth by an average of 1 percent over time, according to NASBO. So he says Rhode Island is also paying just as much attention to growing its economy to pay for increased costs.

“We’re trying to adjust as best we can on the revenue side to grow the economy," Mullaney said on a conference call with reporters. "And then you do what you can with the expenditure side to right the balance."

Slow revenue growth overall has been a big factor in keeping state spending growth muted following the recession. NASBO projects that state revenues will total about $785 billion in fiscal 2016, an average increase of 2.5 percent. It’s a little more than half of last year’s revenue growth rate, which was only driven up by higher income tax collections thanks to a booming stock market.

Minnesota Budget Director Margaret Kelly said that slow jobs growth has played a big role in the pace of the recovery. 

“It took us quite a while for that to get to pre-recession levels and I think for that reason, growth has been slow,” she said.

NASBO’s survey is based on enacted 2016 fiscal year budgets, which for most states began on July 1 this year. Two states -- Illinois and Pennsylvania -- have yet to pass a budget for 2016, so NASBO used as placeholders the general fund figures proposed in their governors’ recommended budgets for fiscal 2016. NASBO plans to update its report with final amounts for both Illinois and Pennsylvania once those states enact budgets.

Liz Farmer is a former GOVERNING fiscal policy writer.
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