state budgets

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.

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.

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.