In most Midwestern states, moderate revenue growth will shape new annual, biennial budgets

As state policymakers begin a new year of budget-making, most in the Midwest will be doing so under fairly strong and stable fiscal conditions. Revenue collection is up in nearly every state in this region; with only a few exceptions, rates of growth for fiscal year 2015 are estimated to be between 2 percent and 5 percent (see table below). In most states, too, similar increases in revenue are being used as a foundation for the new annual or biennial budgets being crafted during this year’s legislative sessions.
 
Across the country, the situation for states is “moderately improving,” the National Association of State Budget Officers says in its December 2014 “The Fiscal Survey of States.”
 
For fiscal year 2015, general-fund spending across all 50 states is expected to grow 3.1 percent. That will mark the fifth straight year of increases after the revenue downturns and budget crises of 2009 and 2010. An improved fiscal outlook has also helped lead to tax cuts in many states, including Indiana, Michigan, Minnesota, Nebraska, Ohio and Wisconsin in 2014. 

Still, most legislatures and governors are having to adjust to an era of less-robust growth. Over the past 35 years, increases in state budgets have averaged 5.5 percent per year, and states have not reached this figure for eight straight fiscal years.

Meanwhile, significant spending pressures remain, most notably in Medicaid. This public health-insurance program, funded by the states and the federal government, has been the fastest-rising line item in state budgets and now accounts to close to one-fifth of general-fund expenditures.

A mix of increased spending demands and limited revenue gains means considerable fiscal challenges for states in the months ahead, the NASBO study concludes.

And in two Midwestern states, Illinois and Kansas, the challenges are especially difficult.

Tough Year ahead in Illinois, Kansas

On Jan. 1, Illinois’ temporary increase in individual and corporate income taxes began to be rolled back. Those two changes in tax law will result in a revenue loss of nearly $2 billion in FY 2015 (equal to about 5 percent of total revenue for the state). The impact of this rollback becomes even more pronounced in FY 2016 — an estimated net decline in revenue of nearly $3 billion. 
 

 
As a result, legislators and newly elected Gov. Bruce Rauner face some tough fiscal choices: extend the temporary tax increases in some way, find other means to raise revenue, or make up for the losses with budget cuts. According to Crain’s Chicago Business, Rauner has asked state agencies to prepare their FY 2016 budgets with a 20 percent cut in spending.  

 

 
In Kansas, general-fund revenues fell 10.8 percent between fiscal years 2012 and 2013 due in part to a series of legislated cuts to the state income tax.

More recently, a $280 million gap in the current budget had to be closed due to a downgrade in FY 2015 revenue projections. In December, Gov. Sam Brownback announced three strategies to fix the deficit: a reduction in state pension contributions, a 4 percent cut in funding for state agencies, and a transfer of money from various funds (including the state’s highway fund) to the general fund. 

The Legislature will have to address an even larger FY 2016 budget deficit during this year’s session.

“Without new revenue, lawmakers will need to cut approximately $669 million just to keep the general fund solvent in FY 2016,” former Kansas budget director Duane Goossen writes in his blog kansasbudget.com. “That would be more than a 10 percent cut to every single item [in the budget], on top of the cuts the governor already imposed in FY 2015.” 

Another factor in Kansas is an ongoing legal challenge to the state’s funding of K-12 education. In late December, a state District Court ruled that the state’s school-finance system was “constitutionally inadequate.”     

 
 
 

 

 

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