Discuss as:

State finances recovering, but new fiscal year brings big tests

The finances of state governments are improving, but states face deep uncertainty in the coming fiscal year as they grapple with the new costs of Medicaid expansion and the long-term costs of state employee pensions.

According to a survey of state fiscal officials released Tuesday by the National Conference of State Legislatures, state revenue has begun to return to pre-recession levels. Thirty states ended their fiscal year with combined balances and rainy day funds of 5 percent or more of their general fund spending.

But the report notes that “the robust return of state revenue collections that typified previous recoveries remains elusive.”

States’ general fund revenue increased in fiscal year 2012 by nearly 3 percent over the prior year, while spending increased by roughly the same amount.

Fiscal officials’ estimate for FY 2013 is that state revenues will go up by 3.7 percent from FY 2012, while they forecast that spending will go up by 2.4 percent.

In most states, the fiscal year runs from July 1 to June 30 of the following calendar year.

Asked to identify the biggest challenges they will face in the coming fiscal year, officials from 22 states indicated that the expansion of the Medicaid program mandated by the Affordable Care Act or other health care costs will be their most difficult problem.

Energy producing states Wyoming and Oklahoma cited low or declining prices for natural gas, coal, and oil as big challenges, while North Dakota said the energy boom in the state is causing a need for increased state spending on infrastructure.

Missouri, Pennsylvania and Montana all cited state employee pensions as the major fiscal challenge in the year ahead, while Alabama and California both cited ballot initiatives on taxing and budgeting as the biggest fiscal tests.

In Alabama, a September ballot measure would transfer $146 million from the oil and gas trust fund into the general fund. If voters reject that ballot measure, the governor and state legislature will need to make budget cuts.

In California, Democratic Gov. Jerry Brown has proposed a sales tax increase and an income tax increase on those earning more than $250,000 a year. The Brown proposal will be put to the voters on the Nov. 6 ballot.

Asked what they see as sources of fiscal strength in the year ahead, officials in most states said revenue growth coming from higher incomes and from increased tax collections. In Pennsylvania, for example, tax revenues are expected to grow at a rate of 3.4 percent, while in Tennessee tax collections have exceeded estimates for 22 consecutive months.

In 2010 and 2011 state governments were able to keep more employees on their payrolls than they otherwise would have due to an infusion of cash from the $830 billion federal stimulus. But that money has mostly run out and, according to the Bureau of Labor Statistics, the number of state employees -- which had risen from 4.9 million in 2004 to 5.2 million in 2008 -- had fallen to just above 5 million in July.