States are our biggest spenders

December 19, 2013

Spending by states, at $1.7 trillion, is about 10 percent of the national GDP. State spending supports education, medical care for low income citizens, assistance to local governments and many other services. State governments are hives of economic activity. Like corporate entities, they must balance their books at the end of every year.

Tax revenues are erratic, so state budget processes must be flexible enough to make mid-year adjustments. Municipal Finance Today reported on good budget news in the recently released National Association of State Budget Officers (NASBO) report:

NASBO in its report said that after several years of recovery, they are seeing noticeable improvements in the state budget environment. Both budget cuts and gaps have decreased, states have enacted net tax cuts in two of the last three fiscal years and revenue collections have outpaced projections.

The Rockefeller Institute reported on Thursday that state revenues are growing at an increasingly slow pace:

State tax revenue growth slowed sharply in the third quarter of 2013. Year-over-year growth was 6.1 percent, based on preliminary data from the Rockefeller Institute, compared with second quarter growth of 9.0 percent and first-quarter growth of 8.6 percent. This is consistent with our prior analysis, which explained that atypical factors had driven growth up in those earlier quarters.

Rockefeller also reported that 41 of 47 early-reporting states reported gains in overall tax collections, while six reported declines. But the devastation of the 2008 financial crisis lingers. From Municipal Finance Today:

But fiscal rebuilding for many states will be slow and the recovery remains precarious. ‘The lingering effects of the recession are still present, as a number of states have yet to surpass pre-recession revenue and spending levels in nominal terms. For many states, operating budgets also face pressures from spending needs in areas such as transportation and infrastructure, as well as pensions and retiree health care,’ the report said. ‘Therefore, uncertainty and significant disruptions from the economy or the federal government can have profound impacts on current state finances. States are building on the fiscal improvements made over the last several years, but sluggish economic growth, federal actions and looming long-term issues continue to have implications for state operating budgets that are slowly on the mend.’

Funds from the federal government account for about 30 percent of state revenues. The passage of a two-year budget by Congress this week is a positive for states, according to NASBO:

While the deal is not a ‘grand bargain’ and fails to address long-term federal budget issues, it provides increased certainty for states, localities and the private sector about federal spending over the next couple of years. The agreement raises discretionary spending by roughly $63 billion over the next two years, compared to the caps under the Budget Control Act (BCA) of 2011, increasing the fiscal 2014 spending limit from $967 billion to $1.012 trillion and the fiscal 2015 spending cap from $995 billion to $1.014 trillion. The overall spending limit increase evenly applies to defense and nondefense spending.

Imagine being a governor and having to set spending priorities a year or two in advance. There are many public initiatives and never enough resources to fund them all. There is a wonderful how-to-guide for governors and other public officials about mastering the budget process by Dall Forsythe, who counseled New York Governor Mario Cuomo and currently is a board member of the Municipal Securities Rulemaking Board. Forsythe’s book, Memos to the Governor: An Introduction to State Budgeting,is a moral and operational guide to balancing the competing needs and interests of a state’s citizens.

Budgets present hard social choices for those who develop them. Will special education students receive more and will literacy programs receive less? Should one fund jails or rehabilitation programs? But the core of budget work is estimating how much revenue is available for spending. Forsythe cautions care in this area:

States are the nation’s biggest spenders. Setting budgets for these giant economic engines is not easy work.

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Puerto Rico Power Authority Reviewed by Moody’s for Downgrade: Moody’s Investors Service on Friday said it placed the rating for the Puerto Rico Electric Power Authority’s, or Prepa’s, bonds on review for possible downgrade.

I’m glad my Prasa’s bonds have already been downgraded!
Puerto Rico Aqueduct and Sewer Authority (PRASA)

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