Some Good News on Economic Front

E-newsletter Issue #105 | December 6, 2012

Idaho Rep. Maxine Bell began the fiscal session of The Council of State Governments 2012 National Conference by stating the obvious.

“We’re still in fiscal trouble,” said Bell, who served as moderator for the session at Dell headquarters in Round Rock, Texas.

But speakers at the session, “State Revenue Outlook 2013 and Beyond,” offered some encouraging news on some of the major issues facing state governments—budgeting, revenue volatility and public pensions.

“We’re coming back to pre-recession levels about a year before we thought,” said Scott Pattison, executive director of the National Association of State Budget Officers. States were expected to return to those spending levels in 2014; Pattison said that’s likely to occur in 2013. In fact, about half the states are already at pre-recession spending levels, Pattison said.

And, he said, the number of states that have had to go back to make mid-year cuts to the budget after the governor signed it dropped to eight states in the last fiscal year and will drop even further—he predicts two or three states—in the current fiscal year.

With regard to revenues, Pattison said, “states are doing better and they’ll continue to do better.”

He doesn’t, however, expect states to reach the historical average for budgeting.

“The trends are good and we’re in a positive area, but unfortunately we may not grow as fast as we did on average,” he said.

States also will have the added challenge of fewer funds from the federal government, “because cuts are coming.”

But the economy is improving, said Rick Mattoon, senior economist and economic adviser at the Federal Reserve Bank of Chicago.

He said the growth in the economy next year is expected to be between 2.6 percent and 2.8 percent, then move up to 3 percent. While the normal expected growth of gross domestic product after a recession is around 5 percent, economists see momentum for the economy, Mattoon said.

Another challenge facing states is the public pension systems of state retirees. About 45 states have addressed that long-term problem with a number of meaningful reforms in the past few years, said Keith Brainard, director of research at the National Association of State Retirement Administrators.

That’s helped improve funding levels of many state and local pension systems—which cover about 12 percent of the U.S. workforce, he said. Pensions have garnered a lot of attention the past few years because of those funding levels, Brainard said, but that attention can be misleading.

“There is no national public pension crisis,” he said. “To the extent there is a crisis or a problem, it is isolated to a state or locality. You’ve got some pretty well funded plans and plans that have real serious problems.”

He reminded policymakers in the room that the main factor in the low levels of pension funding levels is that plan sponsors—state governments in some cases—have failed consistently in the past to make the required contribution to the pension systems.

To make up for that funding failure, states have taken actions that include raising the age a state employee can retire, requiring plan participants to make higher contributions into the plans, lowering annual cost-of-living adjustments and adopting hybrid retirement plans—part defined contribution, part defined benefit.

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