GUEST COLUMN.

At 9:00 AM on December 19th the National Association of State Budget Officers (NASBO) released its Fall 2023 Fiscal Survey of States which provides data on fiscal 2024 state and territory enacted general fund budgets. Its Executive Director Shelby Kerns was generous enough to provide readers of this website with hot-off-the presses highlights of this critically important piece of research. It follows here:

The figures reported in the survey largely point to a continuation of states’ strong fiscal position with a return to more “normal” budget conditions.

After experiencing back-to-back years of revenue growth above 16 percent in fiscal 2021 and 2022, state revenues grew by 0.9 percent in fiscal 2023. In fiscal 2024 enacted budgets, states project revenues to decline a slight 1.8 percent.

There can be a tendency for hand wringing over economic conditions when states project a revenue decline. At this point in time, we are largely experiencing the impact of policy decisions by states as 37 states enacted net tax decreases for fiscal 2024, including both one-time relief measures and ongoing reductions.

Given these significant tax reductions, a better indication of revenue health is how state revenues are faring compared to projections rather than year-over-year performance. It’s notable that, among states able to report on collections year-to-date, general fund revenues for fiscal 2024 were exceeding forecasts at budget enactment in 16 states, were on target in 14, and below forecast in six.

If we aren’t seeing a downturn in economic conditions, what does this signify? I would characterize the current environment as a “return to normal.” Growth in consumption is slowing and consumer behavior – namely a shift from spending on goods to spending on services – is returning to pre-pandemic norms. Inflation– which has a positive impact on both sales and income taxes - is also slowing.

We are also seeing a variation in state revenue performances rather than nearly all states exceeding their revenue projections as in recent fiscal years. State economies and tax structures are impacting revenue collections; for example, states with more progressive tax systems may be experiencing declines due to the weaker stock market last year.

As revenue growth returns to normal levels and pandemic-era federal aid winds down, states will again face difficult decisions amid growing expenditure pressures. Some of the top concerns among states are medical inflation, which impacts both state employee health plans and programs such as Medicaid; employee retention as private sector wages increase; and the impact of inflation on spending, including on infrastructure projects. World events and their impact on the global economy continue to worry state budget officials, as does the looming federal shutdown amid federal budget uncertainty.

States remain in a good position to weather these challenges. Projected revenues for fiscal 2024 in the aggregate are still roughly 34 percent above fiscal 2019 (pre-pandemic) levels. Rainy day fund balances have been bolstered by the strong years of revenue growth, more than doubling from fiscal 2020 to fiscal 2022 and with median balances as a percentage of general fund spending rising from 10.8 percent in fiscal 2022 to a projected 13.8 percent in fiscal 2024 based on states’ enacted budgets.

Total balances (general fund ending balances plus states’ rainy day fund balances) have also swelled in recent years as a result of revenues far exceeding the revenue forecasts used in enacted budgets for fiscal 2021 and fiscal 2022. At the end of fiscal 2022, total balances were more than 3.5 times their aggregate level at the end of fiscal 2020, representing 37.9 percent as a share of total general fund expenditures in fiscal 2022. As states spend down some of their prior-year surpluses total balances are still expected to total 23.2 percent as a percentage of general fund expenditures in fiscal 2024, considerably above their pre-COVID-19 high in fiscal 2019 and roughly double their level going into the Great Recession.

This return to normal, coupled with the wind-down of historic levels of federal aid, will likely feel bad after the past few years of historic revenue growth, especially as many current policymakers have not been in office during a “normal” budget year and economic conditions continue to feel uncertain. However, the latest NASBO survey points to strong state fiscal health and well-funded reserves.  

The contents of this guest column are those of the author and not necessarily those of Barrett and Greene, Inc.