State Fiscal Outlook

December 10, 2012

Later this week, NASBO will release the Fall 2012 edition of the Fiscal Survey of States. Whatever the results, budget decisions will still be difficult for states due to a number of structural factors.

With the looming fiscal cliff being debated by Congress, it’s important for those at the federal level to realize the realities of the fiscal situation in the states. Although most fiscal data indicates that trends are positive, many states may not be able to provide funding for increased Medicaid and K-12 costs – and also fill in for federal budget cuts.

The aggregate state budget growth rate since the end of the recession has remained slow and has yet to reach the average budget growth rate of past decades. This week’s Fiscal Survey results will provide states will a clearer picture, but right now we know that for fiscal years 2011 and 2012, state budgets grew by about 3.5% while the long-term average growth rate is 5.6%.  According to results from the Spring 2012 Fiscal Survey, Medicaid is projected to grow by 3.9% this fiscal year, and there is continued pressure to spend more on K-12 education and many other areas of the budget. K-12 education and Medicaid comprise a large portion of state general fund spending, and with those areas growing, spending for other major program areas will continue to encounter funding challenges.

In the years during and immediately following the recession, state tax collections dropped significantly. Many agencies of state government were forced to make severe budget cuts, and a number of state employees across the country went without salary increases. Aggregate general fund budgets were cut by $64 billion from fiscal 2008 to fiscal 2010. This edition of the Fiscal Survey will show how state budgets are faring compared to those turbulent years.

States reported in the spring that fiscal 2012 trends were positive, but spending pressures in many areas of the budget also remained, especially from budget cuts over the prior few years. With this week’s release of the Fall Fiscal Survey, there will be more clues to how well state budgets are recovering, and to what extent states are prepared for federal actions on the fiscal cliff. While states are in a much better fiscal position than two or three years ago, to what extent remains to be seen.