Budget and Spending

Jennifer Burnett, CSG Program Manager, Fiscal and Economic Development Policy, outlines the top five issues for 2014 related to fiscal and economic development policy, including pervasive federal instability, a sluggish recovery, soaring health care costs, a stagnant labor market and new demands on state resources for economic development.

The current economic malaise and austerity have forced governments to make painful choices and might lead to what some are calling an “intergenerational civil war.” According to a recent article by Newsweek, the US spends more on the elderly than the young. While that fact by itself is not surprising or new, the article attempts to trace out some potential issues with that continued trajectory. According to the Urban Institute's Kids Share study, public spending on children in 2008 (in current dollars) came to $12,164 per child, with about a third of that total coming from the federal government and two-thirds from state and local levels, mostly via education spending.  The elderly by contrast received about $27,117 per person and mostly from the federal government via social security, Medicaid and Medicare.

The State Budget Crisis Task Force, established by Richard Ravitch and Paul Volcker, examined major threats to state fiscal sustainability, including federal deficit reduction, underfunded retirement promises, rapid Medicaid growth, and narrow and eroding tax bases. It recommended better federal-state communication, improved state budgeting and reporting practices, and broader state tax bases.
States experienced their second consecutive year of positive but slow growth in the 2012 fiscal year. Both revenue collections and spending from state funds increased, although at growth levels below the previous year. Additionally, the number of states making mid-year budget cuts continued to decline in 2012 and states have begun to replenish their rainy day funds and reserves. In the 2013 fiscal year, states are expected to continue their improvement, with both state revenues and state spending projected to grow. Revenue growth since the recession, however, remains weak by historical standards and general fund spending is expected to remain below peak levels. States are expected to face tight fiscal conditions for a number of years to come due to federal uncertainty, the slow pace of economic growth and increased spending demands.
Fiscal and economic recovery remains slow and painful for many states, as revenues struggle to get back to pre-recession levels while upward pressures on spending remain. Decreasing and increasingly unpredictable federal spending has put additional pressures on states, especially in the areas of health care and education. Labor trends have improved, but the severity of the recession has left its mark—long-term unemployment rates continue to be elevated, while labor participation rates hit their lowest levels in thirty years.

While the economy has slowly started to rebound and state fiscal positions are getting stronger, high unemployment rates stubbornly remain and state leaders are still struggling to find ways to bring jobs to their states. According to a new Stateline article, states are once again turning to big incentive packages to either retain or lure companies into their states. In addition, states are experimenting with other creative solutions - such as work share - to help usher recovery in to a still-fragile economy.

On a previous blog post I took a look at a Washington Post article that highlighted how arguments across state legislatures are heating when it comes to how best to spend surplus revenue due to the recent rebound in state revenue levels. It was noted that Republican-leaning states tended to use the surplus to cut taxes while Democrat-leaning states tended to use the surplus for social welfare benefits like education. This new Stateline article picks up where that Washington Post article left off and details how some of these states are going about their business. 

Washington, like many states in the 1990s, was grappling with juvenile crime.A new program known as Functional Family Therapy reduced recidivism among those juveniles by 22 percent and cost the state about $3,200 for every juvenile served. 

Stateline Midwest ~ May 2013

Illinois has become only the second U.S. state to enter into a unique kind of bond market — one in which “social impact bonds” are bought and sold.

States will feel it when sequestration takes effect tomorrow, but there could be worse things down the road.  “For states, I would say the hit (from sequestration) is significant, but it’s not catastrophic,” said Chris Whatley, director of CSG’s Washington, D.C., office. When Congress passed the Budget Control Act in 2011, it put into place mandatory budget cuts for both domestic and defense spending if Congress could not agree on a way to reduce the national deficit. Originally set to take effect Jan. 2, the American Taxpayer Relief Act of 2012 extended that deadline to March 1.