State Budgets Improving, But Growth Still Below Historic Rates

When adjusting for inflation, state spending and revenue are both below their pre-recession peaks.
by Ryan Holeywell | December 10, 2013 AT 2:00 PM
Collectively, state spending in FY 2014 will increase an expected 3.8 percent. That's below the historical rate of 5.6 percent. Graph via National Association of State Budget Officers

State budgets are slowing improving, but when considering the impacts of inflation, spending and revenue are both still below their pre-recession peaks, according to the latest report from the National Association of State Budget Officers.

The study highlights unusually low revenue growth for FY 2014, when states are expected to take in just 0.8 percent more than they did the previous year.

Scott Pattison, executive director of NASBO, says even if the projections are overly conservative, that's still dramatically different from FY 2013's 5.7 percent growth rate.

The change is the result of two factors. In many cases, wealthy taxpayers changed the timing of when they collected income in order to avoid higher federal tax rates that were set to begin Jan. 1, 2013. That gave states an artificially big increase in revenue in FY 2013, and a corresponding dip in FY 2014.

But some of the declines are the result of policies enacted by states themselves. Collectively, states cut taxes for FY 2014, Pattison says.

On the spending side, growth is happening at slower-than-average levels too. Collectively, state spending in FY 2014 will increase an expected 3.8 percent. That's below the historical rate of 5.6 percent. Almost all those spending increases were for education and Medicaid.

States are spending more than they did before the recession -- that also happened last year -- but they aren't when the numbers are adjusted for inflation.

Pattison noted that with nearly every state legislature meeting in 2014, and 36 gubernatorial elections next year, "there are going to be tough choices that have to be made" in the constrained fiscal environment.

The good news, Pattison says, is that many states ended FY 2013 with a budget surplus, which will help them handle the slow-down in revenue growth expected this year. States are projecting a decrease in the balance of their reserves, from about 9,6 percent of their expenditures in FY 2013 to 8.4 percent this year. Pattison says that's still a "fairly healthy level."

George Naughton, the Chief Financial Officer of Oregon and president of NASBO, says uncertainty at the federal level has only complicated the job of state officials struggling to manage constrained budgets.

Read the full report below: