State spending expected to rise 12.3% in FY2023 as spending rate slows, NASBO finds

A new report from NASBO (National Association of State Budget Officers), State Expenditures Report for Fiscal Years 2021-2023, finds while spending remains elevated compared to pre-pandemic levels, it is starting to slow. Spending from states’ funds rose 12.3% in FY2023 as a result of states spending surplus funds.

Among the  key findings of the report:

• Total state spending for FYFY 2023 is projected at $2.96 trillion—an increase from $2.78 trillion in FYFY 2022—and represents a total state spending growth of 6.5% (with a median growth rate of 7.5%).
   
• During this same period (FY 2023), federal funds declined 1.8%, with a median growth rate of 0.2%. The decline is related to states expending their Coronavirus Aid Relief and Economic Security (CARES) Act funding and much of the American Rescue Plan Act or ARPA funding. And although federal funding declined during this time, it remains higher than pre-pandemic levels.
   
• In FY 2022, total state spending grew 4.6% (the median growth rate being 8%), with spending from the state’s funds at 8.8% (6.9% on a median basis). However, when looking solely at the states’ general fund spending (excluding other and bonds), the FY 2022 growth rate was 14.3%—the highest rate in NASBO’s history of Expenditure Reports. (In FY 2023, it is estimated that the general spending growth slowed slightly to 11.3%, representing the second-highest growth rate in the history of the reports.)
   
• Like FY 2023, much of FY 2022 state funding was directed towards one-time spending to promote economic growth or respond to the pandemic. Federal funds also declined 1.7% during this time. For FY 2023, general fund spending will represent the largest share of total state spending (at 38%) since FY year 2020. Meanwhile, in FY 2021 and FY 2022, federal funding represented the greatest share of total spending in large part due to the impact of the COVID-19 relief. These two years also mark the only time in NASBO’s expenditure reporting history that federal funding made up a greater share of state expenditures than general funds.

The report also finds that Medicaid continues to rise as a percentage of total state spending, reaching an all-time high of 29.6% in estimated FY 2023, while expenditures for elementary and secondary education remain the second largest area of total state spending in FY 2023 at 18.6%. Higher education is the third largest spending category of state budgets, representing 8.7% of total state spending in FY 2023, a sharp reduction from pre-pandemic total state spending of 10.2% in FY 2019.

NASBO concludes its reporting by noting that the expectation going forward involves slower growth in tax revenue, in what many lawmakers are describing as a return to normal, along with the continued wind-down of federal pandemic funds. NASBO concludes states remain, for the most part, well positioned going forward due to their efforts to bolster fiscal resiliency in the uses of one-time funds, paying down debts, making supplemental pension payments, and increasing reserves and rainy day accounts.

The report is a two-year comprehensive FY survey that details the states’ actual spending in FY 2021 and FY 2022, as well as the estimated spending for FY 2023. It presents data from all 50 states, the three U.S. territories, and Washington D.C. by program areas and funding sources. It also details total spending for regions (grouped by states) and spending comparisons between states and regions.