State Revenue Tops Forecasts as U.S. Governors Reduce Spending

Most U.S. states are collecting more revenue than they forecast this year as the economy recovers, reducing budget deficits that have persisted in the nation’s capitals since the recession.

Thirty-one states collected more than they expected when drafting budgets for the current fiscal year, which ends this month in most states, according to a report released today by the National Governors Association. Still, state leaders moved to slow the growth of spending in the coming year, reflecting uncertainty about the economy, the report found.

“State fiscal conditions are continuing to improve in fiscal 2013, although many state budgets are not fully back to pre-recession levels,” according to the report.

U.S. states are slowly recovering from the 18-month recession that ended three years ago, which forced them to cut back on spending on education, welfare and transportation projects as tax collections tumbled. The need to balance budgets, often mandated by state constitutions, exerted a drag on the economy.

With tax collections improving, only eight states were forced to close a collective $1.7 billion of deficits that emerged in the budgets in the middle of the year, the fewest since the recession.

Budget Shortfalls

For 2013, the difference between what states will collect and what they were poised to spend narrowed to $30.6 billion from $68.1 billion in the previous 12 months, according to the report. Nineteen faced such shortfalls, down from 27 a year earlier.

Governors proposed increasing spending by a total of 2.2 percent to $682.7 billion, a reduction from the previous two years and about half the 4.1 percent projected jump in their revenue.

“Despite some improvements in state budgets since the depths of the recession, state budget growth is still significantly below average, growing at less than half the average rate of growth of the past few decades,” said Scott Pattison, the executive director of the National Association of State Budget Officers, which worked with the Washington-based governors group, in a statement.

Proposed spending increases for the coming year varied. New Jersey proposed the biggest, a 7.2 percent jump, followed by California and Oregon, with jumps of 7 percent and 6.2 percent, respectively, according to the report. Texas, Alabama and Alaska were among the nine states still proposing cuts, according to the report.

Public Employees

The diminished deficits reduced pressure on public employees and local governments. Eleven states, including California, Maryland and Massachusetts, considered dismissing workers in the coming year, down from 15 that did so in the current year. Fourteen states, among them Ohio and Pennsylvania, proposed paring back aid to localities, down from 17 states a year earlier.

The gains in tax collections haven’t eliminated fiscal strains in statehouses, including the cost of providing health care under Medicaid, which has increased as a result of joblessness and rising medical bills.

States’ financial stability may be threatened by a slowdown in the economy, federal budget cuts or tax-law changes, said Dan Crippen, the executive director of the governors’ group.

“Everywhere you look, there’s uncertainty for the fiscal position of states,” he said in an interview.

Debt Crisis

Federal Reserve Chairman Ben Bernanke said this month that the economy is at risk from Europe’s debt crisis and the prospect of federal budget tightening in the U.S. Last month, U.S. employers also added workers at the slowest pace in a year, pushing up the unemployment rate and raising renewed concerns about the pace of growth.

Even with increases proposed for the 2013 budget year, spending would still be $4.6 billion below the 2008 peak. Half of the proposed budgets that were below their peak from five years before, according to the governor’s report.

“States remain cautious about the strength of the national economic recovery,” according to the report. “State budgets reflect a national economy in which growth is slow and not as robust as in previous recoveries, yet overall state fiscal improvement is occurring.”

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