Overall, state fiscal conditions showed modest improvements in fiscal year 2015. Revenue growth accelerated, mostly due to strong income tax collections, while total state spending from all fund sources increased at its fastest rate since 1992 due to additional federal funds from the Affordable Care Act. In addition, the number of states making mid-year budget cuts remained low, and states’ total balances reached an all-time high in actual dollar terms. In fiscal 2016, states expect both revenue and spending to grow slowly. However, some states are facing significant budgetary challenges associated with the decline in oil prices. It is likely that budget proposals for fiscal 2017 and beyond will remain mostly cautious with limited spending growth.

State and local governments have been reshaping their finances since the Great Recession. They have been struggling with three major sources of fiscal stress: slow tax revenue growth, growth in pension contributions that has been heavily concentrated in a few states, and Medicaid spending growth driven by recession-related enrollment. In 37 states, pension contributions plus state-funded Medicaid grew by more than state and local government tax revenue between 2007 and 2014, in real per-capita terms. In response to these strains, state and local governments have cut infrastructure investment, slashed support for higher education, cut spending on K–12 education, cut spending on social benefits other than Medicaid, reduced administrative staff and reduced most other areas of the budget.

According to the National Association of State Budget Officers, most states (46) will start their fiscal year on January 1, 2016. Most states (39) have enacted their budgets for the new fiscal year, including 16 states that operate on a biennial budget and who passed their fiscal year 2017 budgets last year. That leaves 11 states that have yet to enact a budget for 2017: Alaska, California, Delaware, Illinois, Louisiana, Massachusetts, Michigan, New Jersey, Pennsylvania, Rhode Island and West Virginia.

For state budgets, every dollar counts. But this is perhaps even more so the case at a time when state economies are still recovering from the Great Recession. That’s why New Mexico State Auditor Tim Keller decided to take a closer look at state accounts when he was elected in 2014. In February, the New Mexico Office of the State Auditor released the second annual Fund Balance Report, which focuses on unspent funds in state government accounts that don’t automatically revert to the state’s general fund. In New Mexico, Keller took a look at unspent funds across all state agencies that didn’t automatically revert back to the general fund. And the results, he said, were somewhat surprising. “The dollars were much higher than anyone expected.”

CSG Midwest
Governors in two Midwestern states are asking legislators to consider using a new source for funding transportation projects — state budget reserves.
In Nebraska, Gov. Pete Ricketts has proposed creation of a transportation infrastructure bank to accelerate the completion of highway repairs, fix county bridges, and fund projects that help new or expanding businesses. Under LB 960, up to $150 million in cash reserves would be transferred to the infrastructure bank. According to theAmerican Association of State Highway and Transportation Officials, Nebraska is one of four Midwestern states (along with Iowa, North Dakota and South Dakota) that relies entirely on a “pay as you go” model for transportation funding (no bonding).
CSG Midwest
As the new year began in Illinois, there was still seemingly no resolution in sight to a months-old problem: The state had no budget. But even without one in place, many parts of Illinois government continued to operate, as the result of a mix of judicial, legislative and executive actions.
“Government ‘shutdown’ is always in quotes because no government really shuts down,” notes Chris Mooney, director of the University of Illinois Institute on Government and Public Affairs. “It’s always a matter of to what degree — how much government activity is not being done.”
Illinois has been without a budget since July 1 because of a stalemate between the Democrat-led legislature and Republican governor.
Still, according to the Illinois comptroller’s office, 90 percent of state operations are being funded. For example, state employees get paid because of a court order; services for the disabled continue as the result of a consent decree; and other obligations, such as pension payments, are covered under “continuing appropriations” language in state statute. Illinois legislators also have passed emergency spending bills to fund K-12 schools and local governments.
“All states feel disruption without a budget,” says Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, “but the level of disruption varies from state to state.”

CSG Director of Fiscal and Economic Development Policy Jennifer Burnett outlines the top five issues for 2016, including strategic decisions following modest revenue growth, workforce development, public pensions, federal instability, and health care costs. 

CSG Midwest

In the final weeks of this year’s legislative session, Minnesota Rep. Bob Barrett worked successfully to secure $100,000 in state funds for a city in his home district. The money, which came from an existing economic development program, aims to help the city lower taxes and be more competitive within the state, as well as with neighboring Wisconsin. But as Barrett’s appropriations request made its way to final passage, he had to answer questions from colleagues. What will prevent you, the Minnesota Senate chair asked Barrett during conference committee, from coming back next year and requesting even more money? “If this money doesn’t do what it’s intended to do, then I won’t be coming back,” Barrett told fellow legislators. “But if it works, and we [create] new jobs, new businesses, new property taxes in my area, that would be telling you that it was money well spent, and I will be coming back and asking for more.”

In late October, outgoing Speaker of the House John Boehner of Ohio announced his intention to “clean the barn” as much as possible before his successor took the gavel. In keeping his promise, Boehner succeeded in brokering a bipartisan, two-year budget deal to avoid a government shutdown and prevent a government default on its debt. To offset the increased spending caps for defense and discretionary programs, the budget deal included cost-saving provisions for certain programs, some of which—including the following—will have an impact on state governments.

CSG Midwest
Every state uses tax and financial incentives to attract, retain and expand businesses. The benefits are the jobs and economic activity that these firms bring to a state, but what are the costs? In 2012, New York Times investigation put the price tag for states and local governments at more than $80 billion, but to a large degree, policymakers have been establishing and continuing these incentive programs without a firm handle on the costs.
That may begin to change in 2017, when a new rule of the Governmental Accounting Standards Board takes effect. It will require state and local governments to report how much revenue they are losing or willingly not collecting as the result of their tax-abatement agreements with businesses.