State Budgets in 2012 and 2013: Slow Growth Continues as States Face Federal and Economic Uncertainty

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.
 

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About the Author

Brian Sigritz is the Director of State Fiscal Studies at the National Association of State Budget Officers (NASBO). He received his M.P.A. from the George Washington University and his B.A. from St. Bonaventure University. Prior to working at NASBO, Sigritz worked for the Ohio Senate and the Ohio House of Representatives.


Introduction
In the 2012 fiscal year, states continued their slow recovery from the recent economic downturn. Both state revenue and state spending grew for the second consecutive year, although at slower rates than the 2011 fiscal year. State revenues grew by 2.5 percent in 2012, less than 2011’s growth rate of 6.6 percent, but a marked improvement from the 2009 and 2010 fiscal years, when state revenues declined 8 percent and 2.5 percent respectively. Revenues in 2012 were higher than projected in 34 states, were on target in an additional five states and were lower than projected in 10 states.1
 
State spending patterns, for the most part, mirrored revenue collection trends in the 2012 fiscal year. Spending from state funds—general funds and other state funds combined—increased 4 percent in 2012, slightly less than the 2011 fiscal year’s growth level of 4.1 percent, but an improvement from 2010, when spending from state funds experienced an outright decline. While spending from state funds remained positive in 2012, spending from federal funds declined by 8.2 percent—or $46.5 billion—due to the wind down of the American Recovery and Reinvestment Act. The combination of rapidly declining Recovery Act funds and slowly growing revenue collections led to nearly flat growth for total state expenditures—general funds, other state funds, bonds and federal funds combined. After growing 2.8 percent in 2011, total state expenditures grew only 0.1 percent in 2012.2
 
States are projected to once again experience slower than average growth during the 2013 fiscal year. According to governors’ enacted budgets, state revenues are projected to increase 3.9 percent in 2013, while general fund expenditures are expected to increase 2.2 percent. The vast majority of states have assumed at least moderate budget growth. Forty-two states enacted a 2013 budget with general fund spending levels above 2012.3
 
In many ways, states have not fully recovered from the economic downturn, even though state spending and state revenues are projected to grow for the third consecutive year. General fund spending for the 2013 fiscal year remains at $5.5 billion, or 0.8 percent, below its peak level in 2008. Furthermore, 2013 general fund spending levels are 7.9 percent below 2008 after adjusting for inflation. States are forecasting that revenue collections in 2013 will slightly surpass 2008 peak levels by $12.5 billion.4 Revenue growth levels since the end of the recession, however, have been weak by historical standards. States also have begun to replenish rainy day funds and reserves, although total balances remain $7.7 billion below their 2006 peak levels.5 Looking forward, state budgets likely will continue to be constrained as states deal with increased spending demands, revenue changes, economic uncertainty and a possible reduction in federal funds.
 
The Current State Fiscal Condition
Revenues in the 2012 Fiscal Year
State revenues continued their recovery in the 2012 fiscal year. After declining sharply by 8 percent in the 20096 fiscal year and an additional 2.5 percent in the 2010 fiscal year,7 state revenues grew by 6.6 percent in 2011 and by 2.5 percent in 2012. Individually, sales taxes grew by 0.8 percent in 2012 and personal income taxes by 7.8 percent, while corporate income tax collections declined by 0.3 percent. In nominal dollars, sales tax revenues increased by $1.6 billion, personal income tax grew by $20.1 billion and corporate income tax collections declined by $142 million.8 Further indication of improved revenue conditions can be seen in the fact that 2012 revenue collections from all sources9 were higher than final projections in 34 states, on target in five states and lower than projections in 10 states.10 This contrasts sharply from the height of the recent economic downturn. In 2010, revenues were lower than anticipated in 36 states, on target in two states and higher than projections in only 12 states.
 
Revenues in the 2013 Fiscal Year
Revenue collections are projected to grow for a third consecutive year in the 2013 fiscal year. According to enacted budgets, state revenues are projected to grow 3.9 percent, or $26.1 billion, in 2013. Specifically, sales tax collections are projected to be 2.8 percent higher, personal income tax collections are expected to grow 5.5 percent, and corporate income tax collections are projected to increase by 0.5 percent.11 States also are forecasting revenue collections in 2013 will surpass 2008 peak levels by $12.5 billion.12
 
Revenue growth has been roughly in line with forecasts through the first half of 2013. According to the Rockefeller Institute of Government, state revenues grew 2.7 percent for the July through September quarter, and grew 5.8 percent from October through November based on 45 early reporting states.13 Although state tax collections continue to grow for most states, overall revenue growth since the end of the recession has been weak by historical standards. Additionally, state officials are concerned that uncertainty at the federal level could impact the economy and may weaken revenue growth for the remainder of the fiscal year.
 
Tax and Fee Changes in the 2013 Fiscal Year
States enacted $6.9 billion in new taxes and fees in 2013. This contrasts with the 2012 fiscal year, when states enacted a net decrease of $584 million. While states enacted a net increase in new taxes and fees in 2013, the total was much less than during the height of the economic downturn in 2010, when states enacted $23.9 billion in revenue increases. In addition, although states enacted $6.9 billion in net revenue increases for 2013, more states enacted net decreases than increases. Eleven states enacted a net increase in revenue and 20 states enacted a net decrease. The majority share of the revenue increase in 2013 came from two states—California and New York.14
 
In 2013, the largest enacted increase in taxes and fees was in personal income taxes, which increased by $5.8 billion. Of this, $4.7 billion is the result of increased personal income tax rates in California. Five states enacted increases in personal income taxes, while 13 states enacted decreases. The second largest increase was in sales taxes at $1.2 billion, with five states enacting net increases and 12 states enacting net decreases.
 
Other revenue sources that experienced a net increase include fees—$371 million—and cigarette and tobacco taxes—$248 million. Revenue sources that experienced a net decrease include corporate income taxes at $108 million, alcohol at $6 million, motor fuels at $2 million, and other taxes at $572 million.
 
State Spending in the 2012 Fiscal Year
State spending over the past several years was significantly impacted by the recent national recession. Spending from state funds—general funds and other state funds combined—experienced an outright decline in the 2010 fiscal year. As the national economy slowly improved, spending from state funds once again turned positive, increasing 4.1 percent in 2011 and an estimated 4 percent in 2012. While spending from state funds declined in 2010, spending from federal funds rose sharply, increasing by 21.4 percent. This increase in federal funds was directly attributed to the passage of the Recovery Act. The rapid increase in federal funds, however, was short-lived. Federal funds increased only by 0.7 percent in 2011 and are estimated to have declined by 8.2 percent in 2012 due to the wind-down of Recovery Act spending. The combination of state funds slowly increasing and federal funds rapidly declining created a unique and, in some ways, unprecedented fiscal situation for states. Total state expenditures from all fund sources grew 5.4 percent in 2009, slowed somewhat to 3.8 in 2010, slowed further to 2.8 percent in 2011, and are estimated to have increased by only 0.1 percent in 2012.15
 
Looking in greater detail at the 2012 fiscal year, general fund spending is estimated to be $662.8 billion, a 4.3 percent increase from 2011. General funds typically receive their revenue from broad-based state taxes, such as sales and personal income taxes. A slight majority of program areas saw increased general fund spending in 2012. Elementary and secondary education, Medicaid, transportation, and the “all other” category increased in general fund spending, while higher education, public assistance and corrections saw declines. By far the largest growth area in general fund spending was Medicaid, increasing 22.5 percent.16 The significant increase in state general fund Medicaid spending reflects the end of the enhanced federal Medicaid match rate from the Recovery Act. Elementary and secondary education remained the largest category of general fund expenditures in 2012, accounting for 34.7 percent of general fund spending. Medicaid represented 19.6 percent, and higher education accounted for 10 percent. Combined, education—both K–12 and higher education—and Medicaid comprised more than 64 percent of total state general fund spending. Other categories of general fund spending included corrections at 7 percent, public assistance at 1.5 percent, transportation at 0.5 percent and all other spending at 26.6 percent.17
 
Federal fund spending is estimated to be $519.4 billion in the 2012 fiscal year—$46.5 billion, or 8.2 percent, less than 2011. All spending categories of federal funds, with the exception of transportation, experienced significant declines in 2012. Medicaid accounted for the largest share of state spending from federal funds at 43.9 percent, while elementary and secondary education at 10.9 percent and transportation at 8 percent represented the next largest shares.18
 
Total state expenditures—general funds, federal funds, other state funds and bonds combined—grew by an estimated 0.1 percent in 2012 to $1.66 trillion.19 The 0.1 percent increase in total state expenditures in estimated 2012 marks the lowest total state expenditure growth level since the National Association of State Budget Officers’ State Expenditure Report was first published in 1987. Medicaid remained the largest component of total state spending in 2012, representing 23.9 percent of total state expenditures. As recently as 2008, elementary and secondary education represented a larger share of total state expenditures than Medicaid. Other categories of total state expenditures include K–12 at 19.8 percent, higher education at 9.9 percent, transportation at 8.1 percent, corrections at 3.2 percent, public assistance at 1.4 percent, and all other spending at 33.7percent.20
 
Finally, the passage of the Recovery Act produced a temporary dramatic shift in the funding sources for state expenditures. In the 2008 fiscal year, the last year before the Recovery Act, general funds accounted for 45.9 percent of total state spending, federal funds were 26.3 percent, other state funds were 25.5 percent and bonds reflected 2.4 percent of the total. By 2010, general funds accounted for 38.1 percent of total state expenditures, federal funds for 34.9 percent, other state funds for 24.9 percent, and bonds were 2.2 percent of the total. Due to the rapid decline in Recovery Act funds, however, general funds are starting once again to make up a larger component of total state expenditures. In the 2012 fiscal year, general funds are estimated to account for 39.8 percent of total state expenditures, federal funds for 31.2 percent, other state funds for 26.5 percent, and bonds for 2.5 percent.21
 
State Spending in the 2013 Fiscal Year
According to appropriated budgets, general fund expenditures are expected to increase by 2.2 percent in 2013, well below the historical average of 5.6 percent. General fund spending is estimated to be $681.3 billion in 2013, a $14.5 billion increase from 2012.22 Forty-two states enacted a 2013 budget with general fund spending levels above 2012.23 The 2013 fiscal year general fund spending is expected to remain slightly below pre-recession levels, even after assuming a 2.2 percent growth from 2012. General fund spending will remain $5.5 billion—or 0.8 percent—below its peak level in 2008. Aggregate spending levels would need to be even higher to keep up with inflation. General fund spending in 2013 would need to be at $735 billion—or 7.9 percent higher than the $681.3 billion enacted—to be equivalent with 2008 spending levels in real terms.24
 
Budget Cuts
The number of states making mid-year budget cuts continued their downward trend in the 2012 fiscal year. During the midst of the economic downturn, 41 states made midyear cuts in 2009 totaling $31.3 billion, and 39 states made midyear cuts in 2010 totaling $18.3 billion, demonstrating the widespread impact of the recession. The number of states making midyear cuts began to decline in 2011, with 19 states making cuts of $7.4 billion and eight states making net cuts of $1.7 billion in 2012.25 Higher education experienced the largest number of midyear cuts in 2012, with nine states cutting $505 million total. Other program areas that were cut midyear include eight states cutting corrections, seven cutting K–12 education, six cutting Medicaid, three cutting public assistance, and three cutting transportation.26
 
Through December 2012, only one state has made a net midyear budget cut in the 2013 fiscal year.27 The recent decline in the number of states making midyear budget cuts is attributable to revenue growth, spending restraint and more accurate revenue projections. Through December, 2012, 16 states were exceeding revenue projections, while 19 states were on target, and only nine states were seeing revenue coming in lower than projections. Not all states were able to provide preliminary 2013 data.28
 
Balances
Total balances include both ending balances and the amounts in states’ budget stabilization funds. Combined, these reserves reflect the funds states may use to respond to unforeseen circumstances after budget obligations have been met. Forty-eight states have either a budget stabilization or a rainy day fund, with about three-fifths of the states having limits on the size of these funds.29
 
States have begun to replenish their reserves, although they have not returned to peak levels. Total balances peaked in the 2006 fiscal year at $69 billion—11.5 percent of expenditures—and declined to $32.5 billion, or 5.2 percent of expenditures, by 2010. In 2013, balances are projected to be $61.3 billion—9 percent of expenditures. While the 50-state average balance level of 9 percent in 2013 may seem like a significant cushion, two states—Alaska and Texas—represent almost half the total balance. When those two states are removed, total balances drop to 5 percent of expenditures. The informal rule of thumb is that balances should be at least 5 percent of expenditures. Over the last 35 years, balances have averaged 6 percent of general fund expenditures.30
 
Looking Ahead
State fiscal conditions have slowly improved since the end of the national recession. In the vast majority of states, revenues are meeting or exceeding projections and total state general fund revenue in the 2013 fiscal year is projected to surpass peak levels. On the other hand, after adjusting for inflation, revenue collections remain below their pre-recession highs. On the expenditure side, the number of states making midyear budget cuts has sharply declined and general fund spending is projected to increase for a third consecutive year. General fund spending in 2013, however, is expected to remain slightly below pre-recession highs. Finally, while states have begun to replenish rainy day funds and reserves, total balances remain below previous peak levels.
 
Looking forward, states are likely to continue to face tight fiscal conditions for a number of years due to the slow pace of economic growth, federal uncertainty, revenue changes and increased spending demands. Since state revenue is closely tied to economic conditions, revenue collections are not likely to experience a rapid increase without stronger national economic growth. Continued slow revenue growth likely will lead to austere state budgets similar to what has occurred since the end of the recession. General fund spending has increased for three consecutive years but growth levels have remained below historical averages.
 
The federal government also will have a significant impact on future state budgets. Some federal funds to states likely will be reduced as the federal government continues to deal with the national debt and long-term spending pressures. States already have seen how a significant decline in federal funds can impact their overall spending levels. In the 2012 fiscal year, total state expenditure growth was nearly flat due to the rapid decline of Recovery Act funds, even with state funds modestly increasing. Other federal issues, such as implementing the Affordable Care Act and possible changes to the tax code, also may impact state budgets.
 
Finally, states are expected to face tight fiscal conditions due to increased spending demands in areas such as education, health care and infrastructure, and they will need to continue to address long-term liabilities such as pension funding. The combination of all of these factors means that states are likely to experience relatively slow growth for the foreseeable future and will have to make difficult decisions as they continue to maintain balanced budgets and meet their funding obligations.
 
Notes
1. National Association of State Budget Officers, The Fiscal Survey of States, (December 2012), 40–41.
2. National Association of State Budget Officers, State Expenditure Report, (December 2012), 1.
3. The Fiscal Survey of States, (December 2012), vii.
4. See note 1 above.
5. The Fiscal Survey of States, (December 2012), 52.
6. The Fiscal Survey of States, (December 2010), 4.
7. The Fiscal Survey of States, (December 2011), 4.
8. The Fiscal Survey of States, (December 2012), 42–43.
9. “All Sources” includes revenues from sales, personal income, corporate income, gaming taxes, and all other taxes and fees.
10. The Fiscal Survey of States, (December 2012), 41.
11. The Fiscal Survey of States, (December 2012), 44.
12. The Fiscal Survey of States, (December 2012), 40.
13. Nelson A. Rockefeller Institute of Government, State Revenue Report, (February 2013), 1, 4.
14. The Fiscal Survey of States, (December 2012), 45.
15. State Expenditure Report, (December 2012), 1.
16. State Expenditure Report, (December 2012), 6.
17. State Expenditure Report, (December 2012), 9.
18. See note 17 above.
19. State Expenditure Report, (December 2012), 7.
20. See note 17 above.
21. Summary: NASBO State Expenditure Report, (December 2012), 1–2.
22. The Fiscal Survey of States, (December 2012), 5–6.
23. The Fiscal Survey of States, (December 2012), 3.
24. The Fiscal Survey of States, (December 2012), 1.
25. The Fiscal Survey of States, (June 2012), 8–9.
26. The Fiscal Survey of States, (June 2012), 10.
27. The Fiscal Survey of States, (December 2012), 9.
28. See note 10 above.
29. National Association of State Budget Officers, Budget Processes in the States, (Summer 2008), 67–69.
30. See note 5 above.
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