state budgets

A new report from the Congressional Budget Office (CBO) indicates that the U.S. economy through 2030 will have $8 trillion (as measured in 2019 dollars) less in economic activity than the CBO projected just five months ago.  Combined with SSTI’s recent examination of economic recovery that found it took 20 states at least four years for their economy to recover back to Great Recession levels, the impact on state budgets can be expected to be long lasting. In fact, a new examination by SSTI finds that through FY 2018, 15 states’ general revenue funds had not recovered to FY 2008 levels (as measured in 2018 dollars) based on data collected by the National Association of State Budget Officers (NASBO). For an additional 16 states, it took seven to 10 years to reach FY 2008 levels.

After finally beginning to find their footing following the Great Recession of 2008 and having built up their state rainy day funds, states are now finding that it’s not just raining — they are facing a tsunami. With their two main sources of revenue, the income tax and sales tax, both seriously impacted by the historic levels of unemployment claims and shuttered businesses, states are just beginning to try to manage a budgetary storm that could have lasting impacts on their economies. And while some lessons from the most recent recession may help in their recovery, the continuing unknowns from the pandemic will be difficult to measure.

In general, the effect of the pandemic on states’ budgets due to the wave of business, retail, and commerce shutdowns, as well as other reduced economic activity across the nation, is not entirely known, or too early to forecast; however, a number of states are beginning to experience the initial impacts of a substantial downturn. With several states having already enacted their 2020-21 budgets, special sessions are expected later this year to deal with declining revenues. Others ended sessions early without a new fiscal year spending plan in place. Many are also acting quickly to help mitigate the effects of lost revenues and an increased demand for services. Some of the states’ impacts and actions are outlined below.

Postposed primary elections, shuttered schools, sheltering in place orders and millions of workers shifting to home offices while others are displaced completely — the COVID-19 pandemic is radically altering the way of life for the country. States, too, are scrambling to respond to the pandemic while dealing with ongoing legislative sessions and budget negotiations. Some of those responses are detailed here.

As the country’s working age demographic continues to get older, state budgets, especially those in the Northeast, will face greater pressure from increased Medicaid costs, says a new report from S&P Global Ratings. Environmental, Social, And Governance: Increasing Generational Dependency Poses Long-Term Social Risks To U.S. States' Fiscal And Economic Stability examines those trends resulting from the shifting demographics. By 2035, the number of people age 65 and older is expected to outnumber those under the age of 18 for the first time in U.S. history. This is expected to create economic, fiscal and social challenges for state governments.

Proving that innovation is appealing to states regardless of their size or political leanings, new initiatives in both Democratic and Republican states, as well as large states like California and small states like Vermont, are driving innovation agendas into action in areas ranging from clean energy and aid for students and colleges, to new venture capital investments and bond financing to support business collaborations with higher education to help translate cutting-edge research into products and companies. It is important to note that these new initiatives are in addition to important work that is already occurring in many states. SSTI continues to bring you news of these actions as governors, legislatures, and economic development organizations capitalize on proven programs to build out their innovation economies, with several examples provided here.

New Mexico Gov. Michelle Lujan Grisham became the latest governor to propose a plan for free tuition, with what has been called the “one of the most ambitious attempts to make higher education more accessible.” If approved, the plan would allow in-state students to attend any of the 29 state public colleges or universities, regardless of income. It is designed as a “last-dollar” program. If approved, it would be just the second state to offer full tuition coverage to its residents (New York offers the Excelsior scholarship, which will be fully phased in in 2020), according to New Mexico’s governor.

As the summer ends and students begin returning to school, the situation for students in the University of Alaska System is uncertain, although less so after recent negotiations between Gov. Mike Dunleavy and University of Alaska (U.A.) System’s administration. Two months ago, the university’s budget experienced a nearly 41 percent reduction in state support for its system triggered by Dunleavy’s FY 2020 state budget vetoes announced just days before the start of the state’s new fiscal year. While the University of Alaska System has been subjected to a number of funding reductions over the last five years, this year’s funding veto – the cutting of $130 million in state support atop the $5 million cuts approved earlier by lawmakers – was the largest.

New Jersey Gov. Phil Murphy signed multiple bills late last month that may help position the state as a leader in technology-based economic development. One bill increases the tax credit for angel investors in qualified technology companies, with even larger credits available for investments in women- and minority-owned businesses and those located in low-income areas. Meanwhile, the state’s approved FY 2020 budget includes $1.0 million for the New Jersey Commission on Science, Innovation, and Technology. After nearly a decade of receiving no funding from the state, this marks the second consecutive year that the commission will receive $1.0 million to support technology-based economic development.

An issue brief this month from the Pew Research Center asserts that despite the current national economic expansion still underway, states are still coping with lasting effects of the 18-month recession that ended in 2009. Calling it a “lost decade,” the authors found that although budget pressures have eased in several ways, states still have not fully restored cuts in funding for infrastructure, public schools and universities, the number of state workers, and support for local governments. The report, ‘Lost Decade’ Casts a Post-Recession Shadow on State Finances, details 10 ways that states face a legacy from the lost decade, including foregone tax revenue, decreased state spending, and less funding for higher education.