Slow Growth in State Spending and Revenue Continues, Nasbo Data Shows

By Brian Sigritz and Kathryn Vesey White

In December, the National Association of State Budget Officers, or NASBO, released the latest edition of its semiannual Fiscal Survey of States. According to data collected from state budget offices, fiscal 2017 is expected to mark the seventh consecutive annual increase in both general fund spending and revenue. 

There is some good news on the horizon. The budget environment for most states indicates modest growth. However, fiscal progress has been uneven across states, with some facing difficult budgetary challenges. Certain states have been impacted by a variety of factors that pose a challenge to their fiscal health, including the decline in energy prices, demographic changes, tax policy decisions, long-term liabilities and slow economic growth. States are also facing rising spending demands and long-term budget pressures in areas including healthcare, education and infrastructure. The current fiscal environment led states to enact cautious spending plans for fiscal 2017.

Enacted budgets for fiscal 2017 project state general fund revenues will total $809 billion, a 3.6 percent increase over fiscal 2016. At this time, it seems likely that overall actual revenue totals will be lower than these original projections, with general fund collections coming in below forecast in 24 states, on target in 16 states, and above forecast in just four states at the time of data collection (fall 2016), based on those states able to report for fiscal 2017. Similarly, general fund revenue growth was weak in fiscal 2016, increasing just 1.8 percent to $781 billion, after rising 5 percent in fiscal 2015. 

The most recent revenue slowdown has been driven by a number of factors. All three of the largest sources of general fund revenue had a lackluster performance in fiscal 2016. Personal income tax collections were negatively affected by the weak stock market gains in calendar year 2015, and corporate income tax collections outright declined. Sales tax growth was also weak, tempered by low inflation and slower growth in the consumption of taxable goods and services. Additionally, the continued decline in oil and gas prices and coal production affected severance-tax states like Alaska, New Mexico and West Virginia. 

As a result of these lower than expected revenue collections and the consequent budget gaps, many states reduced spending during the year. Nineteen states reported midyear budget decreases in fiscal 2016, a historically high number in a nonrecessionary period.

On the spending side, progress since the Great Recession has been slow, with 32 states spending less in fiscal 2016 than their prerecession peak in fiscal 2008, after accounting for inflation. Aggregate general fund spending increased 3.7 percent in fiscal 2016, a somewhat slower rate of growth than the 4.4 percent increase in fiscal 2015. According to enacted budgets, state general fund spending is estimated to increase 4.3 percent in the aggregate for fiscal 2017, although the final figure may be lower as some states are forced to make spending adjustments. States mainly directed additional funds to K-12 education and Medicaid in fiscal 2017, with 39 states enacting spending increases for K-12, and 34 states enacting increases for Medicaid, including 23 states that expanded Medicaid and 11 non-expansion states. States also enacted net increases in general fund spending for higher education, corrections, transportation and public assistance.

Despite slower revenue growth and other budget challenges, most states have continued to bolster their rainy day funds. Twenty-nine states increased their rainy day fund balances in fiscal 2016, and 25 states project increases in fiscal 2017. The median state rainy day fund balance was 5.1 percent of general fund expenditures in fiscal 2016—above the prerecession peak median level of 4.9 percent in fiscal 2008.

Since data for the fall 2016 Fiscal Survey of States was collected, a number of states have seen weakening fiscal conditions. At least 29 states have revised their revenue forecasts downward at some point during fiscal 2017, with an average downward revision of -1.8 percent. A number of factors have contributed to this, including overly optimistic economic forecasts of gross domestic product, or GDP, and income, and the continued decline in the sales tax base and the lack of growth in the price of tangible goods. The slow revenue growth has led some states to make budget cuts, fund transfers and take other actions to ensure that their budgets remain in balance for fiscal 2017. While most states have revised revenue forecasts downward, at least 13 states revised their forecasts upward or made no change to date.

States are also currently preparing spending plans for the next fiscal year. Governors have released budget proposals for fiscal 2018, which will begin on July 1, 2017, for 46 states (New York begins its fiscal year on April 1, Texas on Sept. 1, and Alabama and Michigan on Oct. 1). Over the coming months, 47 states will enact a new budget for fiscal 2018, while three states previously enacted budgets covering both fiscal 2017 and fiscal 2018. Among the 47 states approving a new budget this year, 17 will authorize a two-year budget covering both fiscal 2018 and fiscal 2019. For most states, fiscal 2018 revenue projections to date are assuming continued slow growth in tax collections, although some are projecting slightly higher levels than the current year. As a result, budget proposals for fiscal 2018 have remained cautious with most governors calling for another year of modest spending growth. 

Some preliminary themes from fiscal 2018 budgets show a continued emphasis on early learning, a re-examination of school funding proposals, a call for increased infrastructure spending, the need for workforce development programs, restructuring of child welfare services, possible pension reforms and new initiatives to help address the opioid crisis. Additionally, a number of governors have called for improving structural balances, rainy day fund increases, and increased efficiency and the consolidation of government services.

As states begin to enact budgets for fiscal 2018, they are not only contending with slow revenue growth and constrained spending, but also federal uncertainty in a number of areas including the possible repeal and replacement of the Affordable Care Act, the consideration of federal tax reform, and discussions regarding various infrastructure proposals. All of these factors combined will require states to make difficult decisions moving forward.

About the Authors

Brian Sigritz is the director of state fiscal studies at NASBO, where he tracks and analyzes tax and revenue trends, transportation, public-private partnerships, energy, and disaster response issues. He also monitors the fiscal health of the states and edits and produces the State Expenditure Report annually.

Kathryn Vesey White is a senior policy analyst at NASBO, where she monitors state budget and policy developments in education and economic development. She also covers state budget process issues such as the use of data and evidence in budgeting, and authors the semiannual Fiscal Survey of States report.

John Hicks is executive director of the National Association of State Budget Officers. He joined NASBO in April 2016. Prior to coming to NASBO, Hicks served in Kentucky state government for 32 years, including 25 years in Kentucky’s Office of State Budget Director. For the last 10 years, he served as the deputy state budget director. Founded in 1945, NASBO serves as the professional organization for all state budget officers of the 50 states and U.S. territories. NASBO collects data and publishes numerous reports on state fiscal conditions and organizes meetings and training for budget and finance officials.