How are states managing the economic recovery? Four key trends.

The improving US economy has helped state governments regain their financial footing, but they’re not exactly flush with cash, according to a report by the National Association of State Budget Officers.

By , Staff writer

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    Secretary of Finance Ric Brown, center, back to camera, addresses members of the Senate Finance committee during a budget briefing for Senate members in the General Assembly Building in Richmond, Va., Thursday.
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An improving national economy has helped state governments across the US to regain their financial footing, but they’re not exactly flush with cash.

That’s the overall message from a report released this week by the National Association of State Budget Officers.

Spending is still relatively tight. State-level spending still hasn’t recovered to pre-recession levels, on an inflation-adjusted basis.

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Tax revenues have revived thanks to the economic recovery, but the gains aren’t coming at a rapid clip.

And looking further ahead, many states confront “unfunded liabilities” such as pensions or retiree health-care promises they’ve made but aren’t fully paying for yet.

“State budgets are expected to continue their trend of moderate improvement,” the report concludes. But “progress is slow … and governors’ recommended budgets indicate that revenue growth may not be sufficient to meet all the competing demands for state resources.”

Here’s a walk through some of the key trends.

Spending

For the coming 2015 fiscal year, spending by state general funds is projected to increase by an average of 2.9 percent, slower than the estimated 5 percent rise in fiscal 2014. States typically have to balance their budgets, so they’re walking a tightrope between the cost of public services like education and the public desire not to see taxes go too high. Key areas where many governors are recommending a spending boost are K-12 education and Medicaid.

One key piece of good news is that budgets are growing more stable as the recession has become more distant in the rear view mirror. Fully 4 in 5 states had to trim costs after setting their budgets for 2009 and 2010. That figure fell to 8 states last year.

Taxes

Governors expect revenue from taxes and fees to grow 3.2 percent in fiscal 2015, up from an estimated 1.2 percent for 2014. But as of the end of last year, 26 states hadn’t yet recovered to pre-recession tax revenues, after adjusting for inflation, according to an analysis by the Pew Charitable Trusts.

Revenue is edging up alongside economic growth. But in some states like California and Illinois it’s also rising because of tax hikes to deal with budget challenges.

The budget officers count eight governors proposing tax hikes and 15 proposing tax cuts. Few of the proposals are large in scale. The states with proposed tax cuts include Florida, Minnesota, New York, and Ohio. Tax hikes have been proposed in Delaware, Massachusetts, and New Jersey.

Liabilities

States don’t have lots of cash on hand for the future, but they generally have done some rebuilding of “rainy day” funds. Excluding Texas and Alaska, which have unusually high reserves, the remaining 48 states have balances (rainy day funds plus any surplus) averaging 3 percent of their expected spending for 2015.

Meanwhile, states have long-term liabilities, including debts plus pensions and retiree health-care costs. Illinois, Connecticut, and New Jersey are among those with high unfunded pension costs, according to the Pew Charitable Trusts, which has a program tracking states’ fiscal health. For all 50 states, when promises by local governments are also factored in, total unfunded pension obligations are over $1 trillion, the group estimates.

Many states have enacted pension reforms since the financial crisis. But Pew notes that bridging the gap will hinge both on pension plans meeting targets for investment returns and on governments actually making the recommended pension contributions, something they fell short of by $21 billion in 2012.

Economy

States’ fiscal health is closely connected to that of their underlying economies. The overall pattern here is slow progress. Unemployment rates have been falling across the nation. But the overall US unemployment rate is still about 2 percentage points higher than it was seven years ago, in the spring of 2007.

And some laggard states are way behind on two fronts. They have jobless rates that are at least 2.7 percentage points higher than in the spring of 2007, and their jobless rates are considerably higher than the national average. These states are Alabama, Nevada, Arizona, Rhode Island, New Mexico, Illinois, California, and New Jersey. Several of these were hit particularly hard by the housing bust that helped push the nation into recession.

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