States’ Fiscal Health Continues to Improve, Governors’ Report Finds

By Matt Cover | June 14, 2012 | 9:03 AM EDT

(AP image)

( - The fiscal health of the states is improving as both revenues and expenditures continue to grow, a new report from the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) finds.

“State fiscal conditions are continuing to improve into fiscal [year] 2013,” reads the biannual Fiscal Survey of States report.

The report found that revenues for the 50 states are projected to increase by $27.4 billion (4.1. percent) over FY 2012 and that spending is expected to increase by $14.6 billion (2.2 percent).

“Governors’ recommended general funding spending of $682.7 billion in fiscal 2013, 2.2 percent above the $668.1 billion estimated in fiscal 2012,” the report said.

Fiscal year 2012, which is only half over for most states, also is expected to show improvement in state finances, rising 3.3 percent above FY 2011 figures.

“Fiscal 2012 general fund expenditures are estimated to be 3.3 percent above the $646.8 billion spent in fiscal 2011,” states the report.

Revenues are expected to improve as well, the report said, and if projections prove accurate, the revenue increases will bring states back to their pre-recession revenue levels.

“General fund revenues are projected to increase by 4.1 percent in fiscal 2013 compared to fiscal 2012 collections,” the report stated. “If state revenue collections reach the levels put forth in governors’ recommended budgets, fiscal 2013 revenue collections will surpass the pre-recession peak in fiscal 2008.”

States’ rainy day funds were also improving. After seeing steep drop-offs during and immediately after the recession, rainy day funds saw a marked increase in funding levels in FY 2011 before declining slightly in FY 2012. For FY 2013, the report noted that governors planned to continue to increase the balances of their rainy day funds.

For fiscal year 2011, the states reported rainy day total balance levels of $46.4 billion, about 7.2 percent of general fund expenditures. That number declined slightly in fiscal year 2012 to $43.6 billion, or 6.5 percent of expenditures.

“Governors recommended raising total balance levels in fiscal 2013 to $53.2 billion or 7.8 percent of general fund expenditures,” according to the report.

When states put money away in their rainy day funds, it is counted as an expenditure from that state’s general fund.

The state fiscal picture does contain some clouds, according to the report, with several states being forced to make mid-year budget cuts when revenue projections did not pan out.

So far in FY 2012, eight states have had to make a total of $1.7 billion in mid-year cuts, an improvement from FY 2011, when 23 states made $7.8 billion in mid-year cuts.

The programs typically faced with cuts in FY 2012 were K-12 education, higher education, and corrections spending. Medicaid and other smaller programs also faced cuts, but not on the level that education and corrections spending did.

Mid-year cuts are often used to address budget gaps, and each state solves its budget problems differently. Some states cut program spending, others cut worker benefits, and some states are forced to use an all-of-the-above approach, cutting programs and employees.

“States also helped solve budget gaps [in FY 2012] by reducing the budgetary impact of state personnel costs with 15 states implementing employee layoffs and 12 states cutting state employee benefits,” according to the report.

States budgets are not back to their pre-recession levels, and continue to reflect the weak economic recovery, with growth in state spending below historical averages.

“[T]otal general fund spending will not yet surpass pre-recession levels. Consequently, state budgets reflect a national economy in which growth is slow and not as robust in previous recoveries, yet overall state fiscal improvement is occuring.”

This is because states “remain cautious” about the poor recovery, the report found. States are also faced with the retraction of federal stimulus funds, which are set to largely expire this year. Without these budgetary subsidies, states must make budget cuts, raise new revenue, dip further into rainy day funds, or some combination of the three.

“Fiscal 2012 budgets have undergone a realignment to adjust for a declining share of federal dollars flowing to states through ARRA [stimulus funds]. Governors’ fiscal 2013 recommended spending plans reflect revenue constraints and an understanding that spending priorities will again face competition for state budget dollars.