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Four Reasons Why State Budgets Aren’t Out of the Woods

January 11, 2013 at 2:16 PM
BY
Elizabeth McNichol

A couple of recent articles on state budgets and growth in state and local government employment could give the mistaken impression that state budget troubles are a thing of the past.  They are not.

As states prepare next year’s budgets, they are taking a second look at fiscal year 2013, which ends June 30 in most states.  Initial reports suggest that a number of states will end the year in the black, mostly because revenues have performed better than projected.  In addition, revenues have stopped declining and state and local employment, which has plummeted by more than half a million jobs from its pre-recession peak, is projected to grow in the near future.

All of this is good news, but there are four reasons why it doesn’t mean that state budgets are out of the woods.

  1. End-of-year surpluses are common. Generally they occur when revenues come in higher than the state estimated when enacting (or revising) its budget.  Almost every state is required by law to balance its budget — in other words, revenues must meet or exceed projected spending.  But estimating future tax collections is inexact in the best of times.  It’s even more difficult when the economy is in crisis and revenues fall by record amounts, as they did in the Great Recession.  So it’s no surprise when a state doesn’t collect exactly the amount of revenues that it projected.
  2. Revenues haven’t fully recovered from the recession. Nationally, revenues remain 5.7 percent below pre-recession (fiscal year 2008) levels, after adjusting for inflation.  Also, revenues aren’t growing as fast as they did after past recessions.  After an initial spurt in fiscal year 2011, when revenues grew by 6.6 percent, growth slowed to 2.5 percent in 2012; states project 3.9 percent growth for 2013.
  3. The recent revenue growth isn’t nearly enough to reverse previous spending cuts. States relied heavily on nearly $300 billion in spending cuts — in education, health care, human services, and so on — to balance their budgets over fiscal years 2008-2012.  They can use the surplus funds to restore some of these cuts, but revenues still fall far short of what’s needed to restore all of them.
  4. Looming cuts in federal grants will put states in an even deeper hole. Those grants, which help fund a range of public services, make up some 20 percent of state and local revenues. Federal policymakers are almost certain to shrink these grants to stay within the 2011 Budget Control Act’s tight annual funding caps for the next decade, and even deeper cuts may be coming as policymakers seek to cut deficits further.

Until the job market fully recovers from the recession, state revenues won’t be healthy enough to support tax cuts or to restore states’ deep cuts in services.