States Plan Meager Spending Increases in Next Year

By Jon Kamp Features Dow Jones Newswires

U.S. states are forecast to barely increase spending in the next fiscal year as they grapple with weak revenue and uncertainty about policy changes in Washington, D.C., according to a new report released Thursday.

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The cautious outlook is reflected in governors' budget proposals for the year that begins July 1 in 46 states, according to the National Association of State Budget Officers. The proposals are aiming for just a 1% increase in general-fund spending in fiscal 2018, the smallest increase since fiscal 2010, when states were grappling with fallout from the last recession, Nasbo found in its latest report.

The small spending increases reflect a persistent problem: weak revenue collection that has dogged states in the last couple of years, raising some worries about how prepared states are for the next recession, according to budget experts.

Nasbo found that revenue collections are coming in weaker than expected for the current fiscal year in a total of 33 states, also the highest number since 2010. Many states also missed projections in the prior fiscal year.

"State's have been dealing with back-to-back years of sluggish revenue growth," said John Hicks, Nasbo's executive director. The data show "how thin states' margins are."

Nasbo said states are forecasting modestly improved revenue collections in the next year. Still, spending levels in final budgets, which some state legislatures are still hammering out, aren't likely to deviate much from the governors' proposals, Mr. Hicks said.

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Wild cards that could reduce the amount of federal money flowing to the states include possible changes in Washington to Medicaid, the tax code and non-defense spending levels, said Nasbo.

Gabriel Petek, sector leader for U.S. states at Standard & Poor's, said sluggish economic growth in the U.S. has helped cause persistent revenue challenges across the states. The specific reasons for that weakness vary, from low energy prices in some states to a shift to more online sales hurting others, according to another state-budget report from the National Conference of State Legislatures.

Arkansas, Illinois, Missouri, New York and Oklahoma have all dealt with weaker-than-expected business taxes, NCSL said. Meantime, sluggish sales and individual income taxes have dogged Mississippi. At least 11 states went into extended or special legislative sessions to hammer out the next budget, NCSL said.

"Caseloads and the need for government services continue to increase, and revenues are not keeping pace with demand," NCSL's report said.

The weakness has put states in an unusually vulnerable position, considering June marks eight years since the end of the last recession, Mr. Petek said. S&P has downgraded ratings for 15 states since the beginning of 2016, compared with just two upgrades, reflecting strained finances and weak revenue, he said.

"The combination has left many states with narrow fiscal margins, which is indeed uncharacteristic for a mature economic expansion," he said.

One of those downgrades came Friday, when S&P lowered the rating on Massachusetts' general obligation debt one notch to AA because the ratings firm didn't feel the state was rebuilding its cash reserves well enough. States lean on these reserves to help manage fiscal downturns.

Massachusetts Gov. Charlie Baker, a Republican in office since January 2015, said in a statement that the state has avoided tax increases while paying down long-term obligations and ending a prior state practice of drawing down reserves to pay for operating expenses. He said he is urging the Democratic-led legislature to make moves to grow reserves more quickly.

States in general have made good progress boosting rainy day funds since the last recession, according to Nasbo. Still, Mr. Petek said states have only replaced about one-third of the jobs cut in response to the last recession, suggesting little margin for spending cuts they might also need to manage another downturn.

"You're touching on critical services that have to be cut back," he said. "I don't think they have a lot of fiscal flexibility."

Write to Jon Kamp at jon.kamp@wsj.com

(END) Dow Jones Newswires

June 15, 2017 00:15 ET (04:15 GMT)