States Still Playing ‘Catch-Up’ In New Budgets

States Still Playing ‘Catch-Up’ in New Budgets

A new survey of recently adopted state budgets finds that in over half the states, general fund spending for FY 2007 — five years into the economic recovery — remains below pre-recession levels as a share of GDP. The report, released by the Center on Budget and Policy Priorities, provides the first 50-state data on spending for fiscal year (FY) 2007, which began July 1 in most states.

The survey finds:

— For the second year in a row, state spending will grow at above-average rates. This recent growth, however, follows several years of state budget cutbacks; just one year ago state spending was at its lowest level in 15 years as a share of GDP. In over half the states, general fund spending for FY 2007 — five years into the economic recovery — remains below pre- recession levels as a share of GDP. The states where spending is furthest below FY 2000 levels are Iowa, Missouri, Tennessee, Mississippi, Wisconsin, Colorado, Oregon, Oklahoma, South Carolina, and Michigan. In these states, state spending as a share of the economy is more than 10 percent less than it was in FY 2000.

— The states with the fastest spending growth between FY 2005 and FY 2007 are primarily those that were trying to catch up from the deep cuts of the recession. On average, spending grew three percentage points faster in states where spending in FY 2005 remained below pre-recession levels than in states where spending exceeded pre-recession levels.

— A number of states have significant budget growth for FY 2007 in part because they are either reversing the budget gimmicks they employed to balance their budgets during the fiscal crisis (for example, by making up for skipped payments to pension funds) or filling depleted rainy day funds. This kind of spending does not expand the public sector.

— As a result of better-than-projected revenue collections, most states ended FY 2006 in the black. Surpluses are common at times when the economy is improving, since state budgets are based on revenue estimates made months before the start of the upcoming fiscal year. Surpluses reflect only the difference between estimated and actual revenue collections; they do not mean that the state has sufficient revenues to reverse previous spending reductions, or even to maintain services at their current levels.

“The economic downturn hit state revenues unusually hard, and states relied to a large degree on spending cuts to close budget gaps. As a result, it will take a number of additional years of above-average growth to restore state budgets to pre-recession levels,” said Liz McNichol, co-author of the report. “A state that responds immediately to the recent good news of strong revenue growth or year-end surpluses with tax cuts or large unfunded program expansions — before the state has reached full recovery — is likely to be overreaching and risking its future fiscal health.”

The full analysis is posted to: http://www.cbpp.org/8-2-06sfp.htm .