state budgets

On Aug. 1, Massachusetts lawmakers ended their 19-month formal session. In the flurry of legislation that was passed, the Legislature failed to agree on the governor’s proposed $3.5 billion economic development package (the Mass Leads Act), which featured $2.8 billion in bond authorizations combined with tax credits and considered a top priority for both the administration and legislative leaders.

In this week’s continuing coverage of gubernatorial addresses as they impact the innovation economy, New Mexico Governor calls for $170 million to bolster hydrogen, geothermal and next-generation battery storage. Rhode Island Governor proposes building a new life science school at the University of Rhode Island and cybersecurity bond to grow Rhode Island College’s cybersecurity program. Meanwhile, West Virginia’s governor proposes increasing spending to attract people to move to the state.

With the start of the new year, governors have begun to deliver their State of the State addresses, laying out proposals for new programs and discussing the conditions of their states. As states’ revenue levels return to more typical levels, lawmakers, with a few exceptions, are taking a more cautious, or constrained, view of their funding priorities and proposed initiatives. Many governors also appear to be more restrained in their addresses this year, speaking more to the previous year’s successes, suggesting lawmakers tighten their state’s fiscal belts while providing targeted investments into key or signature programs, as well as previously proposed initiatives, rather than rolling out new programs, except in the innovation space related to semiconductors and recently announced tech hubs.  

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.

The National Association of State Budget Officers’ (NASBO) Fall 2022 Fiscal Survey of States, released last month, reflects a more positive fiscal environment than last year and found that FY 2022 general fund spending grew a record breaking 18.3%, slightly higher than previous estimates, although when adjusted for inflation, spending grew at a rate of 9.6%. Alongside rising general fund expenditures, general fund revenue grew 14.5% to $1.17 trillion in FY 2022 (slightly lower than FY 2021’s 16.6% increase). Rainy day funds reached record highs, growing an additional 10.43% in FY 2022, from $121.8 to $134.5 billion, building off of FY 2021’s 58% increase over the prior year.

In addition to last week’s Digest story on all state expenditures, the National Association of State Budget Officers’ (NASBO) 2022 State Expenditures Report detailed information on higher education expenditures, finding a 9.4% increase (from $225 to $247 billion) in total higher education expenditures over the past fiscal year, a sizable increase from the 1.7% increase experienced from FY 2020 to 2021. State funds for higher education increased 9.3% and federal funds saw an increase of 12.1%. This represents a large growth in state fund spending (from -0.3% in FY 2021), yet a decrease in momentum for federal fund spending (from 15% in FY 2022).

The National Association of State Budget Officers’ (NASBO) 2022 State Expenditures Report found total state spending to have grown an estimated 7.3% between fiscal years (FY) 2021 and 2022 ($2.66 to $2.86 trillion), 1.5 percentage points higher than the 36-year average growth of 5.8% per annum. This increase in state spending can be largely attributed to an 18.1% surge in general fund spending from FY 2021 to 2022 (following an increase of just 2.2% from FY 2020 to 2021) — the highest rate in the 36-year history of NASBO’s State Expenditure Report history. State spending from outside of the general fund (including bonds) also increased by 5.2% (to $725 billion), while state expenditures from federal funds declined by 0.2% (to $1.08 trillion).

Alabama, Minnesota and Pennsylvania governors are proposing new or increased funding for innovation initiatives. Alabama could see a substantial increase in its Alabama Innovation Fund, while Minnesota’s governor is looking to boost the state’s startup ecosystem and Pennsylvania would increase funding for the Ben Franklin Technology Partners, which has worked for more than 30 years to grow the state’s innovation economy.

As state budgets move into the legislatures for final negotiations and approvals, the last of the governors have addressed their constituents and put forth their proposals. While a renewed sense of hope is seeping into the latest addresses, governors are still cautious and guarded in proposing new programs. Broadband, small business, education and workforce initiatives continue to be among the innovation-related initiatives announced by the state leaders, with the intent that those efforts will also boost the economic recovery of the states.

Several more State of the State addresses were delivered already this month, leaving just a few states yet to go and the pandemic and recovery from the pandemic, not surprisingly, continue to feature heavily in governors’ plans. Energy opportunities, tax cuts, broadband and shifts in the model for higher education are in play in this week’s review of addresses from California, Florida, New Hampshire and Wyoming.