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FY 2021 fiscal environment presents real challenges for many states, NASBO finds

January 07, 2021
By: Mark Skinner

Before America had a pandemic to fight, U.S. governors collectively expected 10.8 percent more revenue to work with in FY 2021 than current estimates projected in the latest National Association of State Budget Officers (NASBO) survey. Thirty-five states reported in the semi-annual survey released Dec. 23 that general funds had not met expectations for FY 2020; 19 states made mid-year cuts as a result.

Rainy day funds for many states were robust as well before 2020 — a record $79 billion at the end of FY 2019. That fact may have played into the decision by some members of Congress not to include state and local governments in the second COVID stimulus package passed in December.

NASBO reports, however, those reserves already were being tapped for a combined, expected two-year hit of nearly $20.0 billion. Additionally, general fund balances were expected to decline by $21 billion before the end of FY 2021 compared to FY 2019.

In all, NASBO reports general fund spending in enacted state FY 2021 budgets (those passed before the survey was being finished) declined by $6.2 billion compared to enacted FY 2020 budgets. The map below presents the one-year change in general fund expenditures for FY 2021.

Tighter or reduced state spending is only one of the likely drags on the national economy for the coming year: poverty levels are rising, personal incomes falling, and consumer spending slowing — all trends based on the latest federal estimates for November behavior. Personal income tax collections for states were estimated to decline by 5.7 percent in FY 2021. That is partially the result of income tax cuts coming in 12 states, most put in place before the pandemic hit.

On the seemingly positive side of the survey results, 18 states were seeing FY 2021 revenues exceeding projections so far. However, a closer look reveals much of that growth is from revenues deferred from the April through June period of 2020 as many states postponed tax filing dates into July. Ten other states already had cut their enacted FY 2021 spending based on lower-than-anticipated revenues. With combined reductions of $3.69 billion, the 10 states are: Hawaii, Indiana, Kansas, Maryland, Missouri, Nevada, New Mexico, Oregon, Texas and Utah.  

NASBO presents data for changes in spending for key program areas in each state enacted budget for FY 2021. Higher education — a critical element for any state’s ability to compete in the innovation-driven economy — experienced a wide range of changes in state-appropriated resources. The map below shows the increase or decrease in higher education spending for FY 2021.

The uneven nature of the pandemic’s economic impact on states, in addition to the uneven economic hit created by the length and severity of any restrictions that governors might have put in place to reduce loss of life, make it more difficult than normal to read real national trends into the survey results.  The revenue changes might be merely short-term aberrations. Adding to the fiscal uncertainty, many states’ economic situations have changed significantly since the NASBO survey was conducted as the pandemic worsened during the final months of calendar year 2020.

As a result, benchmarking a particular state’s performance over others isn’t as productive a guide for setting policy as usual, perhaps. Instead, perusing individual state entries in the many detailed tables presented in the report likely will give a more meaningful sense of the fiscal challenges ahead to sustain or expand state commitments toward supporting research, innovation and entrepreneurship.

Current and past editions of the NASBO Fiscal Survey of the States are available here.

state budgets