One of the greatest concerns for states is the “significant uncertainty surrounding federal tax and spending decisions, which could negatively impact the economy and federal funding for states,” the National Governors Association and the National Association of State Budget Officers wrote in their fall fiscal survey of states released on Friday.
“If Congress fails to act by the end of the calendar year, federal funds flowing to states would decline under the process of automatic across-the-board spending cuts known as sequester,” the groups wrote in the 92-page report. “But even if a sequester is avoided, the likely policies required to address the nation’s long-term fiscal debt problems may also reduce the level of federal funds for states.”
Last week NGA executive committee members met with President Obama at the White House to discuss the ongoing fiscal cliff negotiations and the implications the final package will have on states.
Following the meeting, they said they wanted to be constructive participants in the fiscal cliff discussions and emphasized that any deficit reduction decisions should not accomplished by shifting costs to states or imposing unfunded mandates.
“The uncertainty surrounding federal efforts to cut its debt and the implications this has on states leaves governors with their hands tied,” said NGA Executive Director Dan Crippen. “Another recession would be devastating for states, especially when many states have barely recovered from the last recession.”
Another area of concern is that most of the additional federal support used to stabilize state budgets through the American Recovery and Reinvestment Act of 2009 has expired. And similar to last year, states enacted their fiscal year 2013 budgets without enhanced Medicaid matching rates.
The report found that states expect to collect $693 billion in general fund revenues this fiscal year, which would surpass peak pre-recession levels for the first time since the onset of the recession in 2008. This is $26 billion or 3.9% above the $667 billion collected in fiscal year 2012. States ended fiscal year 2012, which ended on Sept. 30, with total general fund revenues up almost $17 billion or 2.5% over the previous year.
Enacted 2013 budgets include $6.9 billion in net new additional taxes and fees and $2.5 billion in new revenue measures. Eleven states enacted net tax and fee increases while 20 implemented net decreases.
Even with revenue growth, state budgets are still facing pressure, with 24 states enacting lower spending levels in fiscal year 2013 than in fiscal year 2008. Aggregate general fund expenditure levels are also still below the pre-recession peak of $687.3 billion. Spending levels would need to be at $735 billion or 7.9% higher to remain equivalent with real 2008 spending levels.
At the same time, fiscal year 2013 budget gaps are expected to be smaller than previous years. Seventeen states have closed $37 billion in budget gaps since the 2013 fiscal year began and only eight states are expecting budget gaps for fiscal year 2014.