State Spending at Highest Level Since U.S. Recession

U.S. states are set to increase spending this year to the highest levels since the recession as rising tax collections provide funding for programs cut when the economy faltered.

Revenue is exceeding forecasts in 30 states this budget year, ending this month in most states, according to a report released yesterday by the National Governors Association. That’s helping lift spending to a record $699.2 billion, surpassing the previous high in 2008, as the recession took hold.

The report shows how states are rebounding from the 18-month recession, which ended in June 2009. The shrinking economy had prompted them to cut budgets and dismiss workers as revenue tumbled.

“Things are getting a little better for states,” Dan Crippen, the executive director of the Washington-based National Governors Association, said in an interview. “It’s a comfortable moment.”

The stability could be upset by federal spending cuts, rising health-care costs and bills for employee pensions that continue to put pressure on state budgets, Crippen said.

Income tax collections increased 18 percent during the first three months of this year, according to the Nelson A. Rockefeller Institute of Government, based in Albany, New York. That was driven in part by federal tax increases that kicked in this year, causing some taxpayers to sell investments last year to avoid paying higher taxes.

‘Nice Bump’

“Unfortunately, this nice bump in income taxes is not something that’s going to continue,” said Scott Pattison, the executive director of the National Association of State Budget Officers, a Washington-based group that helped compile the report.

With additional money coming in, more than a dozen states adjusted their budgets this fiscal year to add $8.6 billion in spending, largely for schools and health care, according to the report. Many may finish the year with surpluses.

Minnesota lifted spending on schools by $1.6 billion, while Texas increased education spending by $2.1 billion and directed another $4.5 billion to Medicaid, the joint federal and state health-care program for the poor. New York, Illinois, and Washington state also increased spending in the middle of the year.

During the next budget year, states are projected to boost spending by 4.1 percent to $728 billion, the fourth straight increase, according to the report. While that’s little changed from the pace of the last three years, it’s slower than the average 5.5 percent increase in state spending since 1979.

Revenue Projection

Revenue is projected to increase at a slower pace, at 2.8 percent, compared with a 4.2 percent gain in the current year.

“This has been a very difficult time financially for states,” Pattison said. “You’re still seeing a fairly moderate recovery.”

States’ ability to spend more on education and other programs likely will be constrained by rising Medicaid costs, Crippen said.

More residents who currently qualify for the program, and aren’t enrolled, are expected to sign up to meet deadlines for obtaining coverage under the Patient Protection and Affordable Care Act, Crippen said. While the federal government will pay for those who are newly eligible next year as the program expands, states will have to pay part of the cost for the newly enrolled who already qualify.

“States have begun to get a little more fiscal relief,” he said. “But I think that’s very temporary.”

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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