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.

Congress finished 2015 on an unusually productive streak – at least compared to recent years – by passing a variety of legislation important to state governments, including funding the highway trust fund, reforming the Elementary and Secondary Education Act (now called the Every Student Succeeds Act), reauthorizing the highly debated Export-Import Bank, extending a variety of tax incentive provisions, and funding the federal government through September 2016.  Going into a presidential election year, many experts do not expect Congress to act on major policy initiatives before November, and are closely watching what President Obama will do in his final year in office. 

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. 

Fiscal conditions for states were somewhat mixed in the 2014 fiscal year as state general fund revenue growth declined due to the impact of the federal fiscal cliff, while total state spending growth accelerated due to increased federal Medicaid funds from the Affordable Care Act. The number of states making midyear budget cuts remained low and states maintained stable rainy day fund levels. In the 2015 fiscal year, states are expecting both revenue and spending to grow slowly, but below the historical rate of growth. It is likely that budget proposals for the 2016 fiscal year and beyond will remain mostly cautious with limited spending growth.

Fiscal conditions for states were somewhat mixed in the 2014 fiscal year as state general fund revenue growth declined due to the impact of the federal fiscal cliff, while total state spending growth accelerated due to increased federal Medicaid funds from the Affordable Care Act. The number of states making midyear budget cuts remained low and states maintained stable rainy day fund levels. In the 2015 fiscal year, states are expecting both revenue and spending to grow slowly, but below the historical rate of growth. It is likely that budget proposals for the 2016 fiscal year and beyond will remain mostly cautious with limited spending growth.

CSG South

In July 2008, the price of oil per barrel reached an astronomical $147, and the price of gasoline in several states exceeded $5 per gallon; just six months earlier in January 2008, the price per barrel had hovered around $90. Fast forward to the end of 2008, and the price had plunged to under $35 a barrel, when the United States and world economies were in the throes of the Great Recession, the worst economic downturn to sweep over the globe since the Great Depression. Reviewing the price per barrel in the last six months reveals similar trends: in June 2014, oil was around $115 per barrel and six months later, in early January 2015, it had dropped precipitously to below $50 per barrel. Interestingly, the four years with the highest average crude oil prices since the 1860s were 2008, 2011, 2012 and 2013; hence, the steep drop in oil prices is not a “new normal” but a return to more historic price levels. This SLC Regional Resource describes recent trends in oil prices, the reasons for their fluctuations, and the affect they have on individual states and industries in the region.

Real gross domestic product – the total value of the production of goods and services adjusted for price changes – grew in 49 states in 2013. Nationally, nondurable–goods manufacturing contributed the most to real GDP growth, while mining played a key role in the fastest growing states – North Dakota, Wyoming, West Virginia, Oklahoma, and Colorado.

Jennifer Burnett, Program Manager for Fiscal and Economic Development Policy, outlines the top five issues in fiscal and economic development policy for 2015,  including job creations strategies, state innovations in health care spending, public pension solvency, and federal funding uncertainty. 

Fiscal conditions for states continued to moderately improve in the 2013 fiscal year. Revenue collections exceeded projections for the vast majority of states and spending from both state funds and federal funds experienced stronger growth in comparison to the 2012 fiscal year. Additionally, the number of states making midyear budget cuts remained low and states have continued to replenish their rainy day funds and reserves. In the 2014 fiscal year, states are expected to have continued positive revenue and spending growth. Revenue and spending growth rates, however, are expected to be slower than last year. States are cautiously optimistic that fiscal conditions will continue to slowly improve in the 2015 fiscal year and beyond, although challenges remain.

CSG Midwest logo
When the Great Recession began to hit states, they had a total of $59.9 billion in reserves. A year later, total budget gaps were nearly double that figure, $117.3 billion.

“States found themselves woefully short in terms of the amount of savings they had to offset the budget shortfalls created by the crisis,” Robert Zahradnik of The Pew Charitable Trusts told lawmakers at the Midwestern Legislative Conference Annual Meeting. “A lot of that is because savings is not the highest priority when it comes to making state budgets.”

The fiscal crisis is over, but it has opened new questions about budget planning and management. Prior to the Great Recession, for example, a fiscal reserve of 5 percent of the total budget was considered a sound target. Now, Zahradnik said, the preferred goal tends to be between 8 and 10 percent. Part of the reason is that state revenue sources have simply become more volatile, thus the need to better plan for more-extreme “rainy days.”

Pages