States' general fund revenues are projected to return to pre-recession levels next fiscal year but general fund spending is not, suggesting state lawmakers are still cautious about the recovery, according to a report released Tuesday.

Overall, general fund revenue is projected to increase 4.1 percent next fiscal year, while general fund spending will only increase 2.2 percent. The study examines governors' proposed FY 2013 budgets. States' actual budgets often differ from those. In most states, the new fiscal year starts next month.

The fact that revenue is increasing faster than spending is likely a sign that state officials are treading carefully. "Governors have been very cautious fiscally, and I believe prudent, to be providing a cushion to prepare for rather tepid growth," says Scott Pattison, head of the National Association of State Budget Officers, which released the report along with the National Governors Association.

While states in the aggregate are poised to beat their FY 2008 revenues next year, 23 of them still won't have revenue that reaches those levels, according to the report.

The report indicates that overall, state general fund revenue will reach $690.3 billion in FY 2012 -- surpassing 2008 levels by about $10 billion -- while spending will still be about $4.6 billion shy of the pre-recession peak of $687.3 billion.

Pattison highlighted the fact that this fiscal year, few states had to make mid-year cuts, which is a positive sign. Only eight states had to make cuts due to revised budgets in the middle of the year, a sign that most states are meeting their revenue forecasts. "It gives an idea that we're seeing some stability... states are not having to go back and cut after the fact," Pattison said. In 2010, 39 states made mid-year adjustments.

Another positive sign: states are starting to build up their rainy day funds. After having a peak balance of $69 billion in FY 2006, they were slashed in the wake up the recession to less than half their value in FY 2010. In FY 2013, they're projected to increase to $52.3 billion.

But the bad news is that states' revenue growth may not be happening fast enough to help offset the budget cuts of the recession years, and more financial challenges loom on the horizon. The study -- like many state lawmakers -- also sounds the alarm about rising health care costs and the growing burden that Medicaid poses on state budgets.

In FY 2011, which ended about a year ago, Medicaid accounted for nearly 24 percent of state spending, more than any other item. States' Medicaid expenditures surged again this fiscal year by 20 percent, even as the federal government's contributions to the program fell due to the expiration of a stimulus program.

In FY 2013, states' Medicaid costs are projected to increase by about 3.9 percent, while the federal contribution would increase at a slightly slower rate. And as the federal government works to address debt reduction, that number could increase if a grater portion of the expense is shifted to states.

States continue to try to find ways to save money on the program. Next fiscal year, 15 states have proposed reducing provider payment rates -- a step 30 states took this year. States are also proposing to expand managed care programs, impose prescription drug limits and institute higher co-payments, among other reforms designed to rein in costs.

State General Fund Nominal Percentage Expenditure Changes

Changes in expenditures from actual FY 2011 totals to estimates for FY 2012 are shown in the second column in the table below. The third column illustrates changes in estimated FY 2012 expenditures to recommended expenditures for 2013.

Source: Spring 2012 Fiscal Survey of States, by NASBO and NGA.

Spring 2012 Fiscal Survey (Text)