States’ Revenue Rising, Spending Not So Much

Call it the Scott Walkering of America.

Even though tax revenues are finally rising faster than expenses, governors across the nation are recommending more austerity in the budgets they’re presenting to state legislatures this year, the latest survey from the National Governors Association shows.

For the fiscal year beginning July 1, governors are recommending a 2.2 percent increase to $683 billion in general revenue fund spending. That’s down from the 3.3 percent increase in state spending in 2012. Revenue, meanwhile, is projected to rise four percent during the coming fiscal year.

“The public sector has even more uncertainty at this time than the private sector,” said Dan Crippen, executive director of the NGA and former head of the Congressional Budget Office. Citing the looming Supreme Court decision on health care reform, the uncertain levels of federal aid from the “fiscal cliff” negotiations, and talk of tax reform that could cut tax expenditures that benefit state and local governments, “it’s pretty hard for states to plan,” he said.

One of the biggest drivers of state uncertainty is the future of Medicaid. Even without reform, millions of Americans turned to the program for health care after losing jobs during the recession. The downturn and slow recovery caused state Medicaid budgets to soar 23 percent in 2010 and 20 percent in 2011.The Obama administration’s 2009 stimulus program covered most of those early costs. But after the Republicans took over the House in 2011, they cut aid that helped states cope with soaring Medicaid budgets, which now account for nearly a quarter of all state spending.On the bright side, the rapid increases in Medicaid appear to be over (nearly all of the increased coverage under the Affordable Care Act, which doesn’t go into effect until 2014, will be picked up by the federal government). State officials projected their Medicaid budgets will rise only four percent next year.

“States have undertaken numerous actions to contain Medicaid costs, including reducing provider payments, cutting prescription drug benefits, limiting benefits, reforming delivery systems, expanding managed care and enhancing program integrity efforts,” Crippen said. “These efforts alone, however, cannot stop the growth of Medicaid.”

The latest round of state belt-tightening comes after a year of modest recovery in state spending, the survey showed. The 3.3 percent increase in the current fiscal year allowed a number of states to rebuild their rainy day funds.

States like Alaska, Texas, West Virginia and North Dakota that benefit from taxes on the natural resource extraction were especially fortunate. North Dakota recently proposed eliminating its property taxes, while Alaska and Texas budgets soared 27.3 percent and 13.4 percent, respectively this year. Next year, however, both states are projecting large declines in their state budgets because of lower taxes from falling oil prices.

Some of the states hardest hit by the recession are finally seeing an end to the deep cuts. California, for instance, after decreasing its state budget 5.5 percent this year, is projecting a 7 percent increase next year. Michigan’s state budget grew 9 percent this year – the auto industry was an early beneficiary of the Obama stimulus plan – and is projecting another 2 percent increase in state spending next year.

Even states hammered by the real estate crash have finally hit bottom. The governor of Florida, for instance, which cut its budget by 1.7 percent this year, is seeking a 5.9 percent increase in state spending for 2013. Nevada, whose state budget declined by 10 percent in 2012, is expected modest growth in state spending next year.

“Governors are very cautious fiscally and I believe prudent to be providing a cushion to be prepared for rather tepid growth,” said Scott Pattison, executive director of the National Association of State Budget Officers.

Merrill Goozner has been writing about economics and health care for many years. The former chief economics correspondent for the Chicago Tribune, Merrill has written for a long list of publications including the New York Times, The American Prospect, The Washington Post and The Fiscal Times. You can read more pieces by him at GoozNews.