States Fiscally Stable, But Juggling Priorities

by Scott Pattison

As 2016 begins, states are fiscally stable—and the financial situation appears to be pretty good in many cases—but challenges loom ahead as few states have been able to restore cuts made during the Great Recession and resources remain limited.

States have experienced modest revenue growth averaging roughly 3 percent over the past six years, and few states are likely to see shortfalls when the fiscal year ends in June 2016. Nearly all program areas saw at least a small increase in total state spending in the 2015 fiscal year. 

However, when adjusted for inflation, state budgets have not fully recovered to pre-recession levels. As a result, states must continue to prioritize needs and make tough choices about where to put scarce resources. Finalizing budgets during the 2016 legislative sessions will be difficult. 

In other words, spending more on most areas of the state government, fully funding major programs, starting major new programs and making tax cuts will not be possible. Some of those things can occur but, as our mothers told us, “you can’t have it all.” Many states took longer than normal to finish budgets in spring and summer 2015, and this is likely to happen again this year.

Federal funds, particularly for Medicaid and health care, have grown even faster than state funds. In 2015, federal funds to the states increased more than 12 percent. But the recent gains in federal funding to the states likely will slow as the growth in Medicaid enrollment is expected to decelerate in future years after states fully implement the Affordable Care Act.

Most states have been able to fund their Medicaid requirements and increase funding for education, particularly K-12 education, and corrections. That this remains true in 2016, however, appears less likely. 

In fact, the biggest fiscal challenge facing states in 2016 will be funding health care and Medicaid while maintaining sufficient funds for other parts of their budgets or for tax cuts they may wish to enact. And this is true regardless of states’ decisions to expand Medicaid under the Affordable Care Act. Most state budgets are expected to grow at roughly 4 percent in 2016, while health care and Medicaid costs are expected to increase as much as 7 percent in some cases. With Medicaid accounting for nearly 20 percent of state general fund budgets and growing at a faster rate than all remaining budget line items—and more than revenue—ensuring Medicaid costs are covered may mean there’s not enough funding to cover all other expenses in states’ budgets this year. 

Of course, state officials realize they have to think beyond 2016 and the downturn that’s sure to come—hopefully many years from now. To prepare for the next downturn, states will need to continue to increase rainy day funds and other reserves. 

States have made significant strides at boosting rainy day funds already, particularly given the slow growth during the recovery. Despite this, many experts with economic forecasting firms believe that current rainy day levels are not sufficient to get states through another recession. In addition, states need to continue to put money into their liabilities, such as pensions, to reduce their overall financial liabilities. This is good financial management, but it means even less money for immediate programs and therefore tighter resources and tougher decisions.

With the ringing in of 2016, states enter the seventh year of rebuilding since the end of the recession. While state budgets have improved significantly in recent years, state fiscal gains haven’t fully recovered and some budget cuts made during the Great Recession yet remain in place. Despite the challenges, states are in relatively good financial shape, especially compared to most governments throughout the world, all of which have varying levels of significant liabilities. But as legislatures meet and governors propose budgets this year, they will have to carefully manage their resources and prioritize their budgetary wish lists.

About The Author

Scott D. Pattison is the executive director of the National Governors Association. He previously served as the executive director of the National Association of State Budget Officers, the professional organization for state budget officers in the 50 states and U.S. territories, located in Washington, D.C.