National Association of State Budget Officers
State budgets continue to grow at a moderate pace after several years of slow recovery in the national economy following the Great Recession. According to states’ enacted budgets, general fund spending is projected to grow 4.1 percent in fiscal 2016. This growth rate falls below the historical average, though the current inflation rate remains low as well. Forty-three states enacted spending increases in fiscal 2016 compared to fiscal 2015 levels, helping to bolster core services such as K-12 education and health care.
At the same time, progress is slow for a number of states and structural issues remain. States vary in their fiscal health due to a combination of economic, demographic and policy factors. Long-term spending pressures in areas such as health care, education, infrastructure, and pensions continue to pose challenges for many states that will require difficult budgetary decisions. General fund revenue growth was solid in fiscal 2015, helping to strengthen states’ ending balances and bringing total balance levels to an all-time high in actual dollars, though not as a percentage of expenditures. However, revenues are expected to grow more modestly and total balances are projected to decline in fiscal 2016.
State General Fund Spending Expected to Increase 4.1 Percent in Fiscal 2016
In fiscal 2016, general fund expenditures are projected to increase by 4.1 percent, a slower rate of growth than the estimated 4.6 percent increase in fiscal 2015. Enacted budgets show general fund spending increasing to $790.3 billion in fiscal 2016, compared to $759.4 billion in fiscal 2015. General fund spending in fiscal 2014 reached $725.7 billion, a 4.5 percent increase over general fund spending in fiscal 2013.
Enacted budgets in 43 states call for higher general fund spending levels in fiscal 2016 compared to fiscal 2015. However, new spending is expected to be limited, with few additional budget dollars available to address competing spending demands. A majority of states (30) enacted budgets with modest positive spending growth of less than five percent in fiscal 2016, while 13 states project growth of five percent or more. Among the remaining states, four enacted budgets that decrease spending in fiscal 2016, one enacted a budget with no net change in spending, and two states have yet to finalize their budgets for fiscal 2016.
Despite five consecutive years of budget growth and the low inflation environment, state general fund spending for fiscal 2015 for the 50 states combined remains below the fiscal 2008 pre-recession peak, after accounting for inflation. Aggregate spending levels would need to be at $789 billion, or 3.9 percent higher than the $759.4 billion estimated for fiscal 2015, to be equivalent with real 2008 spending levels.
State Budgets Direct Most Additional Spending to K-12 Education and Medicaid in Fiscal 2016
Once again, state budgets in fiscal 2016 directed most additional dollars to boost funding for K-12 education and Medicaid, the two largest areas of state general fund expenditures. Fortyone states enacted spending increases for K-12 education and 31 states enacted increases for Medicaid, for net increases of $14.7 billion and $9.2 billion, respectively. K-12 education and Medicaid together comprise a majority of state general fund spending, according to NASBO’s State Expenditure Report.
Spending increases were enacted for all other areas of the budget in fiscal 2016, with the exception of transportation. However, since most states primarily rely on other fund sources to finance transportation spending, general fund spending adjustments are not necessarily indicative of overall enacted state spending changes for transportation in fiscal 2016.
States Made Minimal Mid-Year Budget Cuts in Fiscal 2015
State budget gaps that arise during the fiscal year are primarily solved through a reduction in previously appropriated spending. Mid-year budget cuts have subsided compared to the years immediately following the recession, when states had to make substantial cuts and take other actions, such as expend rainy day funds, to balance their budgets. Similar to recent years, mid-year budget reduction amounts were minimal in fiscal 2015, with 14 states making net mid-year budget cuts totaling $999 million.
While the number of states with net mid-year budget cuts in fiscal 2015 is a bit higher than has been observed in recent years, most of these reductions were relatively small in value. Also, these reductions do not always reflect fiscal stress or even true spending cuts, but sometimes are the result of technical or accounting changes. At the time of data collection, only two states reported making net midyear budget reductions so far in fiscal 2016 totaling $63 million.
However, since the fiscal year was just underway when data were collected, the number of mid-year budget reductions is likely to increase as the year progresses. In sharp contrast to fiscal 2009, 2010 and 2011, states have enacted minimal midyear cuts over the last several fiscal years, indicating that states’ fiscal situations have stabilized, and budgets are successfully adapting to the current economic and budgetary environment.
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